India's benchmark stock indices, the Nifty and Sensex, have demonstrated remarkable resilience this quarter, defying a broader Asia-wide selloff. While major Asian markets from Japan to South Korea experienced significant declines, Indian equities posted gains, supported by compelling valuations, robust corporate earnings, and a resurgence in foreign portfolio investor (FPI) interest.
Asian Markets Plunge Amid Weakening AI Trade
The quarter saw a notable downturn across most key Asian markets, primarily attributed to a weakening in the artificial intelligence (AI) trade. Data reveals South Korea's Kospi index plummeted 20%, Japan's Nikkei 225 declined 7.25%, and Taiwan's Taiex slumped 15%. Singapore's Straits Times Index fell 7%, while China's Shanghai Composite slipped 4%. Overall, the MSCI Asia Pacific index registered a 7% decline, contrasting sharply with the Indian benchmarks.
India's Outperformance Factors
In stark contrast to their regional peers, the Nifty and Sensex gained between 6.7% and 7.4% during the same period, marking a 14-percentage-point outperformance against the MSCI Asia Pacific index. According to Nomura, this exceptional performance is underpinned by several factors:
- Attractive Valuations: Indian markets were trading below post-pandemic averages across most sectors, suggesting low starting expectations.
- Correction in AI Stocks: The global correction in AI-related stocks indirectly benefited markets less exposed to this segment.
- Strong Earnings Growth: September quarter earnings for Nifty companies exceeded analyst estimates, indicating a healthy corporate landscape.
Robust Corporate Earnings Drive Confidence
Earnings reports from 35 Nifty companies showed a 22% year-on-year growth, surpassing MOFSL's 20% estimate. This recovery was broad-based, extending beyond aggregate figures to various sectors, despite persistent commodity cost pressures and global uncertainties. Key contributors to this incremental growth included Reliance Industries Ltd, JSW Steel Ltd, ICICI Bank Ltd, Coal India Ltd, and Axis Bank Ltd, collectively accounting for 59% of the increase.
FPIs Turn Net Buyers
A significant reversal in foreign investor flows has provided further impetus to Indian equities. After outflows totaling Rs 34,843 crore in October and Rs 35,861 crore in September, foreign portfolio investors (FPIs) turned net buyers in November. NSDL data indicates FPIs purchased Rs 14,863 crore worth of equities in the initial trading sessions of the month, with global funds infusing approximately $3 billion into Indian stocks since mid-October.
Nomura anticipates this positive sentiment towards Indian equities among foreign investors will continue, driving portfolio flows in the near term. Potential factors like a possible cut in Long-Term Capital Gains (LTCG) tax for foreign institutional investors, a fall in global yields, and expectations of rupee stability due to central bank intervention could further bolster market support. While oil prices remain a concern, their recent 7% correction from peak levels offers some relief, potentially propelling the Nifty beyond its March 2027 target of 24,000.