AI trade unwind, FII inflows brighten August outlook for Indian stocks

Mumbai: August has traditionally yielded positive returns for Indian equity investors over the past decade, and analysts expect stocks to extend their recent gains this year as well, amid an evident reversal in foreign-fund exits and unwinding of the AI-skewed trade in Asia.

A runaway rally, however, seems unlikely as investors are wary of the West Asia situation, and its potential impact on oil prices.

Over the past 10 years, Nifty 50 and Nifty 500 have risen in six instances, with average gains of 1.4% and 1.7%, respectively, data from Motilal Oswal Financial Services showed.


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Gains were broad-based. The Nifty Midcap 100 and Nifty Smallcap 250 also advanced on seven and six occasions, respectively, over this period, Bloomberg data showed. "The seasonality trend played out well in July, with month ending positively, in line with our expectations and the trend," said Chandan Taparia, head, technical and derivatives research, Motilal Oswal Financial Services.

'Higher Base'
"While August seasonality remains mixed, we believe the Nifty could continue its upward move after four months of consolidation," said Taparia.

The Nifty climbed 0.3% to end July at 24,383. The NSE benchmark ended the month 2.2% higher.

Taparia said the index has formed a higher base, with immediate support at 24,000, and could move toward 24,750-25,000 as geopolitical factors ease.

'FIIs Returning'
"Foreign investors have also turned positive, while lower VIX and a stable USD/INR are supportive," he said.

In July, foreign institutional investors (FII) have net bought shares over Rs 10,000 crore - the first instance of net purchases since February.

The Nifty Midcap 100 climbed 1.8%, the Smallcap 250 gained 1.1% and the Nifty 500 index rose 2% in July.

"Seasonality wise, August has seen equities faring well. While uncertainty around geopolitical issues remains, incremental unwinding of AI trade augurs well for us," said Sriram Velayudhan, senior vice president, IIFL Capital Services.

He said the Nifty has been forming what appears to be an ascending base triangle over the past few weeks, and it has the potential to test 24,800 in the ensuing sessions if tensions don't intensify further.

Taparia said that with Nifty Next 50 and Nifty 500 breaking out, and mid and small caps showing momentum, they could outperform the benchmark index.

"Autos, Pharma, FMCG and IT have also started performing better, but the market remains selective and stock-specific, with broad-based moves unlikely," he said.

On the other hand, Velayudhan said large caps will likely play catch-up in August, and some of them could undergird the Nifty. "Select NBFCs are looking good while pharma, metals and realty can do well," Velayudhan said.