Market to consolidate for another month, prioritise quality over momentum & value: Sunil Subramaniam

Sunil Subramaniam, Market Expert, says the SIP book is around Rs 25,000 crore, with domestic investments focused on mid and small-cap stocks, while foreign institutional investors (FIIs) target large and mid-cap stocks. This suggests a consolidating market, as fund managers may invest in lower-cap stocks while FIIs divest from higher-cap ones, potentially leading to corrections in large-cap stocks. Fund managers might sell well-performing small-caps for promising large-cap opportunities. Expect a consolidation phase for another month, so patience is essential. As a bullish investor, Subramaniam sees this as a good time to prioritize quality over momentum and value, continuing to acquire high-quality stocks during dips, with significant allocations expected around mid-January.


For a bull like you, there are concerns which you need to be cognizant of. Soaps and shampoos are not selling. GDP is below 7%. Government capex is low and FIIs are selling.
Sunil Subramaniam: Well, you got to look at it as how much of it is short-term and how much of it is sustainable. I do not think any of them is a sustainable thing.


First of all, let us talk about soaps and shampoos. What are the forces at play here? There are two things. One is that while India's per capita GDP has expanded to 2,800 levels, you are seeing that in the K-shape which is true of the consumption also because the rich are getting richer and the poor are remaining where they are. So, a very polarised economic growth is happening, that is number one. The bottom of the pyramid incomes are not growing at the same pace as the one at the top.

The second aspect is inflation. For some reason, despite a good monsoon, food prices are very high. It is a little bit of a puzzle and is probably because the rain fell in the wrong places at the wrong time. But still there is optimism that with the kharif crop and the rabi sowing being good, inflation would head down. At the bottom of the pyramid, inflation eats up. Half of the bottom of the pyramid person's income goes on consumer staples. Those are very critical to him.

If your income is stabilising and inflation is going up, then your consumer surplus is narrowing, and then you will postpone consumption. You will make that bar of soap stretch that much longer, you will make that shampoo last that much longer, that is one.

The second aspect is the two elections back to back, as well as the big parliamentary election. This meant the government took its eyes off the capital which you also mentioned. But as a result, there is a huge trickle-down effect in the economy. For every road or infrastructure that is built, there are people who lift the sand, people who lift the cement. So, if all of those trickle-down incomes have come down, that means further pressure there. So that is the context to the consumption story.

You mentioned that private capex is not picking up. It is the bottom of the pyramid consumption that has to pick up for capex to pick up because high-end K-shaped recovery in the consumption means that less number of units of the big cars and big houses are being sold. But the mass production of the Aadhar housing or the two-wheelers and the entry-level cars is not happening. But capacity utilisation comes from volumes, not from value. So, unless this bottom of the pyramid consumption gets solved, and the capacity utilisation shoots up, private sector capex will only then step in. It is a natural process and we have to be patient to wade through it.

So, what are the steps there? First is inflation hopefully with the monsoon effect and the rabi effect should come down. The government should start spending because they are approaching the budget season. They have to make plans for next year. Now, if they are going to undershoot their capex estimates for this year, they cannot go with a high number. So, I expect a last-minute pump-up through the last quarter of government spending which will automatically have its tickle down effect on the economy.

The other thing is that we talk about the past data, the earnings already gave you a sense of the GDP coming through, the earnings season was so bad that the GDP number should not have been a surprise. Now what the RBI governor is saying is yes, he had to roll back his 7.2% full year to 6.6%, but that being said, he is still sticking from a 5.4% of last quarter to 6.8%. So, there is a 1.4% uptick in GDP that the governor expects probably on the back of the government picking up the capex and the festival season numbers playing out. So, I see no reason for pessimism.

January 10th onwards, when the earnings season comes, because the market has got pessimistic with the GDP data and the earnings, we are also low-balling their estimates. I am sure that the earnings season from January 10th onwards will show a better than consensus numbers and hence an upward revision should be good for the market because the GDP number will only come by the end of February, the economic survey coming just before the Budget might give a clue to that.

I will come to the final point. The government capex will continue to pick up speed, private capex will still take time. But final point about FIIs selling. Why are FIIs selling? I think that first was a few months ago, following the China stimulus and all that and yesterday we are again seeing some China stimulus. But the more important thing is China is not the big thing. The big thing is the dollar strength and if the US economy is recovering on a risk-free basis.

I make 4 plus percent on my debt and I probably make 10-12% on a risk-free basis on the equity market in the US. So that is just a reversal to that. And finally, we are in that stage of that period of the year when hedge fund managers have to book profits. So, they started early, October, November itself. From December, in the first two weeks, there has been an uptick in FII selling. So, bulk of the profit booking is done. That being said, I do not think that they are going to come back in a rush now. Most of them are probably planning their Christmas holidays, New Year vacations, and will come back in the first week of January and then reallocate.

So, even then, they will wait for the earning season to spell out and then they will come back. The Budget again will be a cause for euphoria because the government will lay down reforms. They are confident now with Haryana and Maharashtra turning over whatever pessimism there was about the government's continuance. So, a confident government will continue on its path of reforms. They could give tax relief to boost consumption. I think all of those are positives in the budget season. So, I expect that mid-January onwards, right through the budget season, the FIIs will come back and domestic flows will continue to be strong.

The SIP book continues to be at Rs 25,000 odd crore. The only thing is domestic flows are largely tilted towards the mid and smallcap, whereas the FIIs are largely in the large and midcaps. So, we are going to see a consolidating market. Fund managers have the firepower to buy at the lower end of the cap curve. FIIs are naturally selling at the higher end. So, this tussle of you versus me will see some corrections in the largecaps. If there is a good largecap to buy, a fund manager may sell a good smallcap which has run up a lot. So, we are in for a period of consolidation for another month. Just be patient. As a bull, I see that this is the time to pick good quality over momentum, pick good quality over value as they have been doing and good quality stocks buy them on dips, sustain, but big allocations probably mid-January onwards is where I would expect to happen.

Let us talk about the insurance companies because that was one sector that had not done well. There were overhangs there, but on the other hand, the penetration is low and this is an area which is expected to expand further and that fillip of GST was also expected to come in through. What is your view on the insurance stocks at this point of time?
Sunil Subramaniam: I agree that the penetration story means that for all the minor bottlenecks which will keep coming up in terms of taxation and all of that, overall, it is a very good place to place your bets on. Per capita income is going up in the country to $2800. All of this will have a spill over on the savings pack entirely and insurance is a big part, the awareness post COVID has increased on health insurance and life insurance. I expect that the penetration should rapidly move with the private sector taking the lead. Shorter-term, I would still say buy on dips. Sticking with good quality insurance companies will pay off in the medium term.