Jefferies’ Christopher Wood said that the relative outperformance of Indian equities compared to other markets may make foreign investors cautious. In his latest edition of the Greed & Fear report, he said that emerging market (EM) foreign investors may no longer be ‘overweight’ on India owing to sustained outperformance and strong domestic inflow.

He said, “This is the context where more expensive mid-caps have continued to outperform blue chips with mid-caps accounting for about 60 percent of the inflows but only 30 percent of market capitalisation. This is the backdrop against which many foreigners’ portfolios have been underperforming.”

The Indian stock market could experience a correction, Christopher Wood said, identifying a trigger for this correction as a poor outcome for the incumbent Bharatiya Janata Party (BJP) government led by Narendra Modi in the Lok Sabha elections.

“Still it is entirely possible, if not probable, that the ruling party does not do as well as the BJP was hoping following its unexpectedly positive performance in the state elections held in November. Still even if the BJP wins by ‘only’ the number of seats in the 2019 general election that is quite enough to run the government as the past five years have demonstrated,” he said.

Changes to the capital gains tax structure expected in the forthcoming full Budget later this year could also result in a stock market correction, he said, adding, “The reason that such proposals are apparently under consideration is growing evidence of retail speculation, most particularly in the options market where India has options for individual stocks. Such paper speculation is unlikely to be viewed as healthy by Modi, or indeed the BJP. GREED & fear’s probably correct assumption is that the Indian Prime Minister has a natural suspicion of those making money out of money, most particularly in a zero-sum game like options.”