While DII flows have been robust for the past few years, rising global interest rates have kept FPI flows under check, as per Quantum Mutual Fund.
DIIs have invested $ 20.2 bn in 2023 on top of $ 35.8 bn in 2022. FPI flows have been tepid at $ 12.8 bn this year, but better than the outflow of $ 16.5 bn in 2022. This has resulted in decadal low FPI ownership in Indian equities.
As global inflation and interest rates moderate, India’s stable policy environment and resilient economy could attract meaningful foreign flows. The year 2023 defied the consensus view of moderate equity returns given the background of rising global interest rates, limited scope for valuation expansion and elevated crude prices amid geo-political tensions, the report said.
The Sensex delivered a total return of 19.1 per cent, majorly supported by earnings growth. BSE Mid cap and BSE Small cap indices delivered returns of 44.7 per cent and 46.7 per cent respectively.
Returns in large and mid-cap indices were majorly driven by earnings growth with flattish earnings multiple. This is indicative of the strengthening of the earnings upcycle which commenced in FY22.
Small and mid-cap stocks have recorded relatively better returns compared to their earnings growth. Apart from normalisation in earnings, higher flows into these categories have contributed to the superior returns in the segment. Cumulative share of flows into small and mid-cap categories over the past three years stands at 28.3 per cent vs AUM share of 19 per cent.
On the back of relatively lower historic returns compared to earnings growth, large caps appear favourable on a risk-reward basis.