Expect increased volatility but not a deep correction; FIIs to be back in January: Sunil Subramaniam

Sunil Subramaniam, Market Expert, says from a volatility perspective, 22,500 -23,000 is a level around which the Nifty should hold. He does not think it will go below that because domestic fund managers will see a big buying opportunity if it corrects that much. That is the support level I see for Nifty by the end of the year.


As soon as the markets start trending down, we mark the reasons. Yes, there are concerns over high valuations and foreign outflows and the weak rupee, but are we well and truly out of the Trump trade that we saw? Are foreign investors now more or less convinced of higher returns from American equities and bonds rather than Asian and Indian equities?
Sunil Subramaniam: No, I am not sure it is that easy. There are three reasons for the sell-off. One of them is the fact that Trump is coming to power. The US is a very attractive market because they do not have a currency risk when they invest in the US and Trump's actions are going to be pro-US businesses, so they do expect tax cuts to come in and they expect that Trump will impose tariffs on China and other countries, so US manufacturing should get a boost. So, naturally, there is a Trump trade going on in the US stock market.


Second, the debt market in the US is also predicting a higher interest rate. The long end of the interest rate curve has started rising. One gets risk-free interest rates of 4% plus in the US. It makes it that much harder to consider an emerging market for investment. This is an overall net negative to the emerging market trend. The second aspect here is to look at the fact that in India, the earnings season has not turned out as expected. Even the prior earnings expectations were higher, India was looking expensive and so whenever there was a positive China news, we saw money flowing out of India into China.

But now this earning season has confirmed that there is indeed the impact of two things. One, the lack of consumption pickup in the pre-festival period, plus the fact that government spending for the first half has gone quiet on capex. So, a combination of these factors led to people revising down their FY25 and FY26 earnings. So, naturally, India looks even more expensive from an FII perspective.

But a third and equally important reason has to be taken into account; as we end the close of the calendar year, hedge funds have to book cash profits to pay bonuses to their fund managers. Now, even before the recent correction, the MSCI India index had delivered 27% returns for the year. So, they will book profits in that market where they make the most money, and India is one of those. So naturally, that profit booking will now be going on. So, it is all the three factors put together.

Coming to the point that you made about how expensive equities are in our part of the world, compared to what is happening in the US and other emerging markets as well, how is India faring? Even American equities are not cheap. Nvidia is trading at a multiple of 65x?
Sunil Subramaniam: Yes, but in the US, the rally has been very concentrated. But now it will become more broad-based because the US manufacturing is now going to get an allocation of equity capital. Earlier, it was mostly the FAANG or the tech stocks, the AI related stocks like Nvidia, which took the Nasdaq to great heights. In the S&P 500, there are lots of manufacturing companies which are now getting a boost. So, in the US, a sector rotation is happening away from those that rallied a lot to a lot of others. So, it is not just a matter of US versus India.

The second aspect here is that from India's perspective, it has always been a case of a good long-term story for long-term capital. But short-term hedge funds are always looking for the best price point from which he can make money and so China became attractive sometime. Like I said, a Trump trade is happening in the US.

Soon when Trump's policies come out, and he appoints his secretaries for various things, there will be clarity. It will cool down and I would expect that come January, we should see the return of the FII to India because this money which they are getting by booking profits will need to be redeployed.

Second, the Diwali season has gone well for certain sectors, so when the October-November-December quarter earnings come out in January, I expect the market to revise the earnings upwards. The valuations will look healthier because there has been a correction and there will be an earnings upgrade.

Then on February 1st, there will be the Indian budget. So, there will be hype and the hoopla around the capex spend. Also, the government has not spent in the first half and so they have to increase the spending, otherwise that money lapses. So, I expect the government to step up its capex spending this quarter. I expect next quarter's earnings to be better and hence following revision and upgrade, the valuations look much healthier for a return of the FIIs., I expect the return of the prodigal son in January and so it should come back.

Meanwhile, do you agree with the perception that any stock on the Nifty today that is worth buying is either fully priced or trading way above its two-year average? That suggests our markets have peaked, at least for the moment. We will have to wait for January. But meanwhile, how deep will the correction run?
Sunil Subramaniam: So, the correction cannot run very much deeper because you just saw the mutual fund inflows come in today. There was a record SIP book of Rs 25,000 crore, a record Rs 40,000 -odd crore in pure equity, another Rs 9,000 crore has just come into hybrids and the passives have also raised Rs 10,000 crore this month. So, domestic fund managers are sitting on Rs 60,000-70,000 crore of money raised last month which will act as an effective buyer to protect the fall.

I would say the FIIs will be disappointed because when they sell off, the deeper correction will make it easy for re-entry, but the Indian domestic investors are not allowing this. These flows have come in because mutual fund distributors and investors have seen the correction as a buying opportunity. So, a strong domestic support for the stock markets will ensure that the falls will not be very severe. There will be volatility, there will be falls. Those falls will be there because when fund managers have cash on hand, they do not buy the stocks immediately, they wait for them to fall further to maximise their profits. So there will be some amount of volatility because domestic fund managers will wait for stocks to correct and then step in and buy. So, I expect increased volatility but not necessarily a deep correction.

So, volatility is something that we should brace for. But when you talk about profit booking, which are the sectors where that is likely to happen the most? Is it going to be PSU stocks after the run-up they have had? How do you expect the financials to do? Is there going to be a lot of profit booking there?
Sunil Subramaniam: I do not think so because in the last one year, the Nifty return was about 27% before the current fall and the Bank Nifty had delivered only 20%. So, the Bank Nifty has not been the one which has driven the Nifty up. In the PSUs, energy sector is one; metals are under pressure.

I expect those valuations to rise up sharply and financials are not among those. This is where the correction is. Definitely some PSUs, definitely energy, some amount of metals, and maybe some related infra-related sector like defence. All those which ran up a lot, will see that profit booking.

Profit driven stocks are likely to take some of the biggest knocks, at least from some quarters. Q2 earnings have been rather weak, and look at today's trade. The FMCG pack got those declines for a second session on the trot and stocks like Britannia, Godrej Consumer have led losses. They are talking about pressure on margins with higher input costs. We are talking about certain weaknesses in demand at this stage and those could last, don’t you think?
Sunil Subramaniam: I would say the negative surprise has been the urban demand cooling off. So, rural demand will hold up on a good monsoon, but urban demand definitely has cooled off unexpectedly. That is why these FMCG pack stocks are showing the correction. But I would still say that in January, when FIIs come back, FMCG will be among the top picks because they are safer because they are not so cyclical and sharper.

So the correction in FMCG consumption is going to be fairly short-lived. There would not be sharp drops going forward. I would say buy on dips will be a good strategy around the consumption pack because in the new year, consumption will pick up strongly. I think that is my read of the market. So, I am not sure that consumption is something that you would be selling a lot of and buy-on-dips should be the better strategy there.

Where are you seeing Nifty at the end of this calendar year?
Sunil Subramaniam: From a volatility perspective, 22,500 -23,000 is a level around which the Nifty should hold. I do not think it will go below that because domestic fund managers will see a big buying opportunity if it corrects that much. That is the support level I see for Nifty by the end of the year.