Amid FII Selloff, Bernstein Favours Large Caps With 26,500 Target For Nifty — Here's Why

Most foreign institutional investors remained underweight on India with varying degrees of underweight positions, changing their constructive stance seen during July-August period last year, Bernstein said.

The brokerage is now selective buyer of large caps, expecting Nifty 50 to reach 26,500. It, however, remains on the sidelines where small- and mid-caps are concerned, citing valuation and macro concerns.

Sharp foreign fund outflows from India around October last year suggest that some FIIs acted early, but the recent outflow suggests most were influenced in the present time, the brokerage noted.

This underweight sentiment is sometimes enough to signal bottoming out, but the "surprising resilience" of domestic investors needs to be watched.

The NSE Nifty 50 is down 14% from its peak in September 2024 and trading near January 2024 levels as of now. The small- and mid-cap indices have been in bearish territory, falling around 20% and 24% from their peaks, respectively. Those indices are now at near April 2024 levels.

The correction levels across indices suggested that FIIs who stayed invested in India have not generated any returns, rather they are logging losses now.

Around 87% of NSE Nifty 500 stocks have fallen from their values in October 2024, by an average 20%. Despite earnings decline, valuation projections for the top 90 stocks does not show them getting any cheaper compared to averages. The Nifty 50 is at 10.6%, slightly below its last 10-year averages, making it more appealing than mid-caps which are still at premium, Bernstein said.

Macro Concerns Hound FIIs

Most FIIs are still concerned about India's macroeconomic factors in the near-term. The reason is lack of sustainability in consumption despite proper actions, less investment focus, absence of large drivers, and looming impact of tariffs from the US. In contrast to the FIIs, Bernstein believes that the macroeconomic factors-related challenges have bottomed out in India. From here on, there will be modest improvements every quarter. Investments are also improving given the underspending of every quarter. Bernstein also believes the recent consumption push though short-term will be enough to raise the urban demand.

Weaker Rupee Sours Bets

Other than macroeconomic concerns, FIIs also appeared concerned about the rupee's depreciation in the backdrop of the US tariffs. They were also not happy with just 25-basis-point rate cut by the Reserve Bank of India, Bernstein said.

The brokerage believes all the unknows of the global markets will be known soon which will cause the dollar index to peak, offering sufficient room for rate cuts.

Given so many factors weighing on FIIs' minds regarding India's recovery in near-term and uncertainty about global macroeconomic factors, Bernstein believes that foreign fund outflows is yet to peak.

As far as Bernstein's view on India is concerned, the India story is still there. "Our view is that fundamentally little has changed. India's growth story has always been about the pillars of manufacturing, infrastructure and digitisation, instead of 'prosaic' growth where it follows in the footsteps of China and other economies."