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Mumbai: The current market conditions are primed for a bull market supported by strong flows from from foreign portfolio investors, said HSBC.
"FIIs coming back into Indian equities gels well with our overall expectation that current market conditions are primed for a bull market ahead.
We expect FII flows to remain strong, as they continue to add to their holdings in Indian equities, which has fallen to a five-year low," said HSBC.
FPIs have returned in a big way to Indian markets recently thanks to improved chances of ruling coalition coming back to power and US Federal Reserve's extended pause on rates.
Flows in March into Indian equity have touched 27,900 crore, on track to be the highest inflow in a month in two years.
CLSA also believes that higher probability of a stable government has been the key factor in the rapid turnaround in investor sentiment around India.
"The recent military skirmish with Pakistan could well prove the equivalent for Modi of what the Falklands War was for the late and great Margaret Thatcher in 1982… As for Modi, he is reaping the rewards of a robust response to the killing of more than 40 Indian soldiers in Kashmir on 14 February," said CLSA's Chief Strategist Christopher Wood on Thursday in his weekly note 'Greed and Fear'.
Wood sees more room for FPIs to increase their weightage towards India as they have not added to their holdings for three years.
Wood has a double overweight on India in CLSA's Asia Pacific ex-Japan relative-return portfolio.
Even as foreign flows are expected to stay strong, the slowdown in domestic flows is a cause of concern for many.
DIIs have sold local shares worth Rs 12,800 crore so far in March.
So far this year, FPIs have bought Indian stocks worth Rs 42,800 crore and DIIs have net sold local stocks worth Rs 11,200 crore on a year-to-date basis.
HSBC believes that DII flows are structural and will return as the market rallies.
"We see DII flows as structural, backed by longer-term trends of i) financialisation of savings, and ii) penetration-led growth opportunity for domestic mutual funds," said HSBC.
The financial services firm sees the recent weakness in DII flows as a temporary blip and expects flows to normalise as redemption pressure on mutual funds eases with the market rally.
