Jefferies, in its recent analysis, shed light on the dynamics of retail investment in the Indian equity market and the contrasting performance of foreign portfolio investors (FPIs). According to their findings, 36 per cent of direct retail investment is concentrated in stocks beyond the top-100, surpassing the 20 per cent holding by FPIs. Retail participation, including direct engagement and discretionary mutual funds (excluding SIPs), has been 1.5 times higher than SIP inflows in the initial four months of the current calendar year. Notably, there has been a significant surge in active investors' purchases, rising sevenfold compared to pre-Covid levels, as highlighted in Jefferies' GREED and fear note.
In contrast, FPIs have divested a net sum of USD 4.7 billion in Indian stocks this quarter and USD 3.3 billion year-to-date. Jefferies attributes this trend partly to the underperformance of traditionally favored sectors, such as private sector banks and IT services, in which FPIs have substantial holdings. The Nifty Private Banks index has lagged behind the Nifty by 14 per cent since May 2023 and by 30 per cent since March 2019, while the Nifty IT Index has underperformed by 15 per cent since mid-February and by 34 per cent since late December 2021.
Despite this underperformance, private sector banks like HDFC Bank and ICICI Bank have historically delivered remarkable returns. Since the end of Q3 2002, HDFC Bank has witnessed a staggering 4,491 per cent rise and ICICI Bank Ltd a 3,330 per cent increase in US dollar terms on a total-return basis. Jefferies acknowledges a growing narrative speculating on the peak performance of private sector banks, yet emphasises their continued relevance as investments, especially for value-oriented investors. The recent correction in HDFC Bank's valuation, trading at 1.9 times one-year forward price-to-book from 3.4 times in early 2021, presents an opportunity for value investors. Moreover, HDFC Bank's strategic move to replace higher cost borrowings over a few years enhances its long-term prospects.
Jefferies maintains a 23 per cent weighting in private sector banks within its portfolio, recognising their potential amidst evolving market dynamics. While these banks face challenges and uncertainties, their valuation levels make them increasingly attractive for discerning investors, especially given the positive outlook on India's domestic demand cycle.
