Indian equity markets are poised for a new growth phase driven by fast-moving consumer goods (FMCG), consumer discretionary, and building material companies, according to a leading wealth management expert. This shift comes as foreign institutional investors (FIIs) are expected to return to Indian shores following a period of valuation correction.
Market Sustainability and Growth Drivers
Vipul Bhowar, Senior Director and Head of Equities at Mumbai-based Waterfield Advisors, asserts that the current market highs are sustainable. He points to several government initiatives implemented since March that have boosted consumption, including income tax cuts, RBI rate cuts, GST reductions, and the anticipated Eighth Pay Commission revisions expected from January.
"The market will trend higher from here on," Bhowar stated. "Smartly, the government has lowered speculation in derivatives and also banned real money games. So, now whatever capex was done for the last few years should end up getting consumed."
While expecting 10-12% returns for the Nifty 50 over the next year—slightly lower than the spectacular performance of recent years—Bhowar emphasizes that leadership will rotate. "The next leg of growth will come from FMCG, consumer discretionary, building material companies, and others," he explained, noting potential for returns exceeding 12% depending on global economic conditions.
FII Return and Valuation Comfort
The expert highlighted a significant shift in foreign investor behavior. Indian market valuations had reached a 100% premium to emerging markets in September last year, making them an expensive proposition for international investors. This premium has now moderated to around 60%, historically a more comfortable level.
"Now that we have reverted to a 60% premium, FIIs are coming back in some way," Bhowar observed. He attributed previous FII outflows to profit-booking after substantial market gains since 2020, rather than fundamental concerns about India's growth story.
Interestingly, FIIs have remained active in primary markets. "FIIs have been positive in IPOs. They're selling the old economy and buying the new economy," Bhowar noted, adding that he would have been concerned if foreign investors were exiting primary markets as well.
Contrarian Views and Alternative Assets
Bhowar shared several contrarian perspectives, including a positive outlook on artificial intelligence's impact on India. He believes IT services companies using AI to improve productivity—potentially reducing hiring needs—could ultimately benefit the sector.
He also expressed optimism about the quick service restaurant (QSR) sector, contrary to prevailing market sentiment. "Now inflation is at its lowest... When milk and vegetable prices rise, it hits (QSR chains) and they can't pass on costs quickly. Now the reverse is happening... they'll ensure that the margins come back," he explained, noting that companies have added protein-focused items to menus and completed significant store expansion.
For high-net-worth individuals (HNIs), Bhowar revealed a trend toward diversification into long-term growth pools. "Earlier, everything they invested in sat in the market pool: fully liquid, easily sold within a week. But now around 5-15% of a large family's assets go into a growth pool," which includes unlisted equity, private equity funds, infrastructure, and real estate with assumed 10-year lock-ins.
He also recommended REITs, InvITs, and commodities like gold and silver to clients seeking better post-tax yields than traditional fixed income assets, noting the tax advantages of dividend income from REITs.
IPO Valuations and Promoter Dilution
Addressing concerns about increasing offer-for-sale (OFS) components in IPOs—rising from 23% during 2005-2015 to 29% in 2015-2025—Bhowar expressed a positive view. He believes promoters who navigated business challenges, particularly through the difficult period since 2020, deserve to be rewarded when they dilute stakes.
"The hardships the promoters have gone through from 2020 is immense, where many promoters have shut shop also. These are the promoters who stood back and managed their business, managed their employees, and now if they want to dilute their equity, they should be rewarded," he argued.
Bhowar distinguished between healthy dilution and concerning exits: "It becomes a problem when the promoter is diluting, moving out, and not then having control in the company." He also dismissed concerns about IPOs being "priced to perfection," suggesting that investors seeking quick listing gains should potentially lose money, while long-term investors would benefit from properly valued offerings.
