Amidst cautious optimism, markets keep eyes open

Lucknow / Mumbai: The third quarter of 2024 has proven unique for India’s venture capital (VC) landscape. According to the latest KPMG Private Enterprise’s Venture Pulse report, India defied global trends, registering a solid $3.6 billion in venture capital investments, primarily from consumer-focused (B2C) companies. This impressive resilience is in stark contrast to other parts of Asia and globally, where B2B companies have traditionally led the way in securing VC investments. In India, however, consumer-focused companies not only attracted the highest rounds but also drove the renewed optimism in the market.

A Unique Surge in Consumer-Focused Investment

India’s venture capital trends have highlighted the market’s shift towards consumer-focused firms. In a notable deviation from broader global and Asian trends, B2C companies in India raised considerable funding, showcasing the evolving preferences of venture capitalists toward businesses that cater directly to consumers. As Nitish Poddar, Partner and National Leader, Private Equity at KPMG in India, noted, “Investors will back businesses that align with two key themes—path to profitability and/or strong growth trajectory with a high level of customer engagement.”

This trend is particularly relevant given India’s large and youthful consumer base, which continues to fuel demand across various sectors such as e-commerce, education, healthcare, and fintech. Traditional banking institutions in India are introducing more tech-based solutions aimed at the country’s unbanked and underbanked populations, resulting in increased competition for fintech startups. Despite this, the broader consumer-driven sectors remain attractive to investors, reinforcing the idea that Indian consumers are driving a significant portion of the economy’s growth.

Fintech Faces Investor Caution

Despite the robust interest in consumer-focused companies, the fintech sector is witnessing a slight pullback from venture capitalists. Historically, fintech has been a key investment area in India, given the country’s high proportion of unbanked citizens. However, as conventional banks increasingly introduce fintech products targeting these populations, venture capitalists have started to exercise caution. This shift reflects a natural maturation in the sector, where traditional banks are leveraging their resources and infrastructure to compete with fintech startups, offering digital banking solutions that meet modern customer demands.

The cooling interest in fintech could also indicate a broader shift in investor priorities, with VCs gravitating towards sectors that exhibit a stronger path to profitability or customer engagement, as highlighted by Poddar. This transition could lead to more targeted investments in fintech companies that demonstrate unique value propositions or align closely with market gaps rather than simply offering broad-based financial services.

Rise in Retail Investor Interest and Stock Market Growth

Coinciding with the positive trends in venture capital, retail investor participation in India’s stock markets has surged. The National Stock Exchange (NSE) reported a record number of retail investors, with nearly 3.7 million new investors joining in September alone, pushing the total number of investors to 10.37 crore. This increase reflects sustained interest and confidence in the equity markets, underpinned by the Nifty index’s approximately 3% rise during the same period.

The NSE’s report noted a significant rise in retail investor participation from regions like North and East India, which grew by 34.9% and 33%, respectively, from September 2023 to September 2024. This regional diversification indicates a growing awareness and appetite for stock market investments beyond the traditionally dominant western states. Maharashtra continues to lead with 1.7 crore investors, followed by Uttar Pradesh, which crossed the one-crore mark earlier this year. This broadening investor base is vital for the Indian economy, as it brings more capital into the market and fosters a more inclusive financial ecosystem.

Recent Market Volatility and Retail Investor Concerns

Despite the robust growth in venture capital and retail investment, India’s stock market has experienced notable volatility recently, as evidenced by an 8% drop in the BSE Sensex and NSE Nifty50 indices from their all-time highs. This correction has particularly affected mid-cap and small-cap stocks, with individual stocks in these categories witnessing 20–30% declines. Such steep drops have raised concerns among retail investors, many of whom are new to the market and may not be accustomed to this level of volatility.

For instance, Varun Kumar, a 35-year-old lawyer from Gurugram, and Shruti Sharma, a 26-year-old IT professional from Bengaluru, both saw significant declines in their portfolios and are considering whether to exit their positions to limit losses. This trend of panic-selling among retail investors reflects both the risks and challenges of market volatility for individuals who may lack long-term investment strategies or the capacity to withstand temporary setbacks.

Market Experts’ Perspective: Staying the Course

Amidst the downturn, market experts advise against panic-selling. Vikaas Sachdeva, MD of Shriram Alternate, emphasizes the importance of sticking to systematic investment plans (SIPs) and maintaining asset allocation discipline. He suggests that investors could view the current market dip as an opportunity to acquire high-quality stocks at lower valuations, especially in sectors such as defense and public sector utilities, which are expected to recover over time.

Similarly, Union Mutual Fund CEO Madhu Nair highlights the importance of long-term perspectives, emphasizing that core fund assets are actively managed by professionals. Investors are encouraged to maintain their SIPs and avoid reactive trading. Utkarsh Sinha, MD of Bexley Advisors, also supports the notion of staying invested, noting that dips provide a chance to buy into index funds or diversified equity funds, which offer a buffer against individual stock volatility.

Foreign Portfolio Investor (FPI) Outflows and High Valuations

A significant factor contributing to the recent market decline has been the substantial outflow of foreign portfolio investments (FPIs), with approximately ₹102,931 crore withdrawn by FPIs by October 24, 2024. High valuations in Indian markets, along with attractive investment opportunities in cheaper Chinese markets, have led to this shift. Currently, the Nifty50 trades at 20.6 times forward earnings, while Hong Kong’s Hang Seng and Shanghai’s Composite Index trade at 9.4 and 12 times, respectively, making India comparatively more expensive.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, attributes the FPI selling to China’s recent stimulus measures, which have made its markets more attractive. Furthermore, geopolitical uncertainties in the Middle East and ongoing concerns surrounding the upcoming US presidential race have added to the market’s bearish sentiment. As a result, foreign investors are opting to reallocate their funds toward more cost-effective markets, adding downward pressure on Indian equities.

Potential for Recovery and Long-Term Outlook

While the current market outlook remains cautious, experts believe that the underlying fundamentals of the Indian economy remain strong, and the downturn may represent a temporary setback. The continuous rise in consumer-focused investments and increasing participation from retail investors suggest a resilient market foundation, with potential for recovery as market sentiment stabilizes.

Goldman Sachs recently revised its Asia/emerging markets portfolio stance from “overweight” to “neutral,” reflecting broader concerns about slower economic growth and corporate earnings in the region. However, with India’s substantial domestic demand and a large, young population, the country’s economy remains poised for growth, making it a favorable long-term investment destination. For investors, this correction might be a pivotal moment to recalibrate portfolios, potentially focusing on diversified assets that offer stability amidst market fluctuations.

Balancing Optimism with Caution

The third quarter of 2024 has underscored India’s resilience in the venture capital market, with strong funding flows toward consumer-focused companies, a trend contrary to global norms. This sectoral focus aligns well with India’s demographic dynamics and the broader economic shift toward consumer-driven growth. Retail investor participation continues to soar, even as the stock market faces short-term pressures. Market experts encourage investors to remain patient, emphasizing the importance of long-term perspectives amidst near-term volatility.

In the context of global investment trends, India’s economic landscape presents unique opportunities as well as challenges. Rising venture capital investments in consumer-focused sectors, coupled with a growing retail investor base, position India as an attractive market for domestic and international investors alike. Despite the recent market corrections, the robust structural factors supporting India’s economy indicate that the current downturn could be an opportune time to build long-term wealth through prudent, diversified investment strategies.