As India cements its position as the world’s fourth-largest economy, optimism around Indian equity markets continues to grow. Investors, especially retail participants, are keen to understand whether this upward trajectory can sustain and how foreign institutional investors (FIIs) are positioning themselves — particularly when it comes to choosing between China and India in a complex global environment.
A seasoned market expert Devina Mehra recently addressed this very concern, offering practical insights on global fund flows, sectoral preferences, and the hidden risks investors often overlook. Her message was clear: India continues to hold promise, and investors should avoid overreacting to global capital movement patterns.
She explained that it is not productive to speculate on whether FIIs will prefer China over India. The idea that fund flows are a zero-sum game — where money entering China means money leaving India — is fundamentally flawed. In reality, institutional investors are allocating across multiple geographies based on opportunity and risk profiles. Her own fund, for example, has currently underweighted the United States, overweighed Europe, and maintains a favorable outlook on both China and India. According to her, while China’s market has not crossed its 2007 highs, the country’s GDP has grown nearly sevenfold since then. Eventually, such a wide gap between economic performance and stock market returns tends to correct itself.
In contrast, the Indian markets, despite occasional volatility, have shown remarkable resilience. Her advice to Indian investors is simple: stay invested. She emphasized that while India’s economy and its markets are closely watched, they are still two different entities. Economic growth does not always translate immediately into market performance, and vice versa.
For those seeking sectoral guidance, she offered a glimpse into her firm's Portfolio Management Services (PMS) and Smallcase strategy. Since the beginning of 2024, they have maintained an overweight position in auto components and pharmaceutical or healthcare sectors. The pharma space, in particular, has seen consistent growth in allocation, making it one of the most heavily favored sectors relative to index weights.
Another sector that has entered the overweight list more recently is fast-moving consumer goods (FMCG). In the last few quarterly rebalances, more stocks from this space have entered their investment models, reflecting a growing conviction in its potential.
Banking, interestingly, is not yet overweight in their portfolio, although the outlook is improving. She pointed out that aside from 2022, banking indices have underperformed in 2020, 2021, 2023, and 2024. Given this prolonged underperformance, some reversal seems likely. In the last two rebalancing rounds, the weight of banking stocks has increased, suggesting that the sector is becoming more attractive, though still approached with some caution.
On the other hand, sectors like energy, utilities, paints, and real estate currently have little or no exposure in their portfolios. These are areas where the firm either sees valuation concerns or limited near-term growth potential.
When asked about the recent investor excitement around defense stocks — especially in light of post-ceasefire announcements and government orders — she responded with a measured viewpoint. Her firm previously held defense stocks, but for almost a year now, they have exited most of their positions.
She explained that while order books in defense and infrastructure companies often look attractive, investors overlook key risks. First, getting payments from government contracts is notoriously difficult. As someone with experience in banking and equity research, she knows that securing an order is just one part of the journey. Converting that into revenue — especially timely revenue — is another challenge altogether.
Government contracts are typically awarded to the lowest bidder, which compresses margins from the start. Moreover, projects often face cost overruns, especially in areas like roads and bridges. Extracting extra payments for these overruns can be a bureaucratic nightmare. Often, a portion of the payment is held back until project completion and verification, and accessing that final tranche of money involves significant time and effort — sometimes representing the entire profit margin.
She stressed that investors often chase themes and jump into sectors when they appear to be booming. But defense, much like infrastructure, is not as straightforward as it seems. The risks, both financial and operational, are far more complex than just order volumes.
In conclusion, India remains a compelling long-term investment destination. FIIs may allocate funds to China, but that doesn’t mean they are ignoring India. Both countries offer unique opportunities, and institutional portfolios reflect this balanced approach. For retail investors, the key is to remain informed and disciplined. Stay invested, follow sectoral trends thoughtfully, and resist the temptation to chase hype without understanding the underlying fundamentals.
While pharma, FMCG, and auto components currently look strong, banking is gradually turning favorable. In contrast, defense stocks, despite their recent buzz, require deeper scrutiny and a more cautious approach. Long-term wealth creation will always favor consistency, awareness, and the ability to look beyond surface-level excitement.
Disclaimer: This article is for informational purposes only and should not be construed as financial advice. Investors are advised to conduct their own research or consult a qualified financial advisor before making investment decisions.
