Foreign investors flock to companies focused on domestic sectors

India’s economic recovery and softer commodity prices are expected to fuel earnings at domestic-focused companies, while export-oriented sectors remain vulnerable to currency volatility, geopolitical uncertainties, and the looming slowdown in developed countries.

Among key sectors that have seen renewed FPI interest are financials, consumer discretionary, industrials, fast-moving consumer goods (FMCG) and telecom. The banking, financial services and insurance sector, which saw FPI selling of $7.36 billion in the first half of 2022, has seen net FPI buying of $1.73 billion in the second half till 31 August. The FMCG sector saw FPI buying of $1.66 billion in July and August.

The outlook for banks remains strong, driven by rising credit growth, improving asset quality, and better net interest margin expected in the coming quarters. Meanwhile, the outlook for FMCG has brightened because of volumes growth aided by economic recovery, and declining commodity prices.

“We believe Indian FMCG companies are poised for a recovery in volumes and margins starting 2HFY23,” said Kunal Vohra of BNP Paribas Equities Research.

Moderating input prices after a steep rise in Q1 have also aided FMCG companies. The trend of price hikes continued, albeit at a slower pace, as companies sought to offset the impact of inflation of the earlier quarters.

India is a domestically oriented economy with favourable demographics, a strong manufacturing base, highly skilled manpower, stable government and policies, with little dependence on developed market demand for growth, according to Nishit Master, portfolio manager at Axis Securities.

Telecom has seen FII inflows of $943 million during July and August, while the industrial, capital goods, and construction sectors have got combined investments of more than $1 billion. Consumer durables and automobile companies have seen $844 million FPI investments during July and August, while healthcare services attracted more than $1 billion.

Meanwhile, FPIs turned away from sectors such as oil and gas, IT and metals.

Metals have seen a price correction led by the expected weakening of demand in developed countries. Oil and gas producers got hit by windfall taxes, while oil marketers see uncertainties on marketing margins as they cannot completely pass through the high crude prices.

IT services continue to see weak sentiments because of the expected slowdown in developed countries and the benefit of a strong dollar being negated by other weakening currencies.

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