Share prices in India are likely "troughing", which could spur a reversal in foreign portfolio investors' sentiment, according to Morgan Stanley. Domestic investors have to sell or new issuance has to rise for FPI inflows to happen.
Predicting return of FPI inflows into India is more burdensome than predicting growth return, the brokerage said. Growth has likely bottomed out in the mid-cycle slowdown, given the policy pivot, Morgan Stanley said.
Share prices depend on growth ultimately, instead on flows from outside. Now, the scenario which is unfolding in front of traders is that growth is likely turning and share price could be bottoming out. Financial stocks will likely lead the way out of the correction, as India is on the cusp of a recovery in lending, consumption, and capital expenditure, the brokerage said.
FPIs' ability to call India's relative performance appears weak, according to Morgan Stanley. "If FPI flows were smart, they would correspond with great predictability in market returns," the brokerage said.
FPI flows do not differ in force from domestic funds. Hedge funds have more discretion over their action. Hence, they are able to have more impact on share prices over time, depending on circumstances, Morgan Stanley said.
Nevertheless, macro environment in India depends on FPI flows. Indian markets require inflows from FPIs, which influences currency, liquidity in the banking sector, inflation and growth. This in turn adds to share price gains, Morgan Stanley said.
FPIs have made 'solid' return in India. However, in recent years, overseas investors have struggled to beat MSCI India index, underperforming since 2022. Hence, positive long-return will be an important factor in flow reversal, the brokerage said.
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