“Now, Nifty is trading a little below its historical average valuation. This is a fair value market. The excesses of the past have been corrected, and now this is probably a time for long-term investors to start accumulating,” Shah said.
However, he cautioned that investors should be mindful of ongoing foreign institutional investor (FII) selling pressure. “Never stand in front of a running train…Remember that right now the mood of FPI is on the selling side. It is your opportunity to accumulate, not to buy everything today.”
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While mid-caps delivered earnings growth in line with expectations in the last quarter, small-caps have seen earnings decline. “Within small and mid-cap, go for quality, go for reasonable valuation,” he advised.
The broader market trend, according to Shah, will depend on how FIIs approach Indian equities in the coming months.
“If I had to sum up, maybe there was a trade where rupee was likely to come down, Indian market was likely to come down, American market was likely to go up, there was a trade waiting to be taken, and FPIs took it,” he said.
While a large part of that is now behind us, he believes the momentum for FPI is on the selling side. “They are doing quit emerging market and ‘ghar wapsi’ to America, but not every FPI is a seller,” he noted.
These are the edited excerpts of the interview.
Q: Now what, are we there yet in terms of having paid the price for the excesses etc. and let us just divide this question for in two parts. For the Nifty which just purely on a PE multiple basis, seems to have fallen to averages and then mid them smallcaps?A: As of today, it looks like foreign portfolio investments (FPIs) are aggressively selling. On Friday, net of passive funds, buying of about ₹8,000 crore, the cross-sell number was about ₹20,000 crore. Never stand in front of a running train. If they are selling aggressively, undoubtedly, buyers will continue to buy at lower and lower prices, and as long as they are selling continues, we think markets unlikely to settle. Buyers will continue to buy at a lower end, lower prices.
In terms of valuation now, Nifty is trading little below its historical average valuation. This is a fair value market. The excesses of the past has been corrected, and now this is probably time for long term investors to start accumulating. But keeping in mind, don’t stand in front of a running train.
In the small and midcaps, again, there is a divergence. Last quarter midcaps earnings growth was in line with expectation that more than 20%. Smallcaps de-grew by similar amount, and again, it was little below expectation. Within small and midcap, go for quality, go for reasonable valuation. But do remember that right now the mood of FPIs is on the selling side, it is your opportunity to accumulate, not to buy everything today.Q: What is behind this FII selling. Recently, there has been another line of argument, just a clamour for the government perhaps, to look at capital gains tax and how maybe the hike was a mistake in comparison with other countries. Just wanted your thoughts there.
A: One, trying to figure out FPI is like five blind men trying to identify elephant because there is no one homogeneous set of foreign portfolio investors. The University Endowment Funds and Sovereign Wealth Funds have been buyer in our market. The long only, the passive, the US based FPIs, some of the pension and insurance companies have been sellers. Within FPI not everyone is seller, not everyone is buyer.
Now, some of the reasons why FPIs have turned sellers. One Indian market had expectations built in and the September GDP growth number, December GDP growth number, as well as quarterly earnings of September 2024 in December 2024 quarter came below expectation. It couldn’t justify those valuation.
On top of it, America first, make America great again, resulted into American vacuum cleaner starting which is collecting money from all the emerging markets. Every emerging market is witnessing outflow, and China hasn’t published numbers since October 2024 so we don’t know whether they are receiving inflows or outflows. But if someone is not publishing number, your guess is likely to be as good as mine.
Number three, our rupee also was overvalued, that provided good exit to the FPIs. If I had to sum up, maybe there was a trade where rupee was likely to come down, Indian market was likely to come down, American market was likely to go up, there was a trade waiting to be taken, and FPIs took it. A large part of that is now behind us, but right now, the momentum for FPI is on the selling side. But do remember they are doing quit emerging market and ‘ghar wapsi’ to America, and not every FPI is a seller. If we look at the data of December 2024 quarter, sovereign wealth funds and university endowment funds have been buyers. Yesterday, I was on a panel with Samir Arora, where he said that being an FPI, they have received net inflows for December as well as January month.
Q: There is one point of view, as markets correct, that maybe capital gains tax should not have been touched, etc. What are your thoughts?
A: One there should be parity, Gujarati mein kahavat hai, – ghar na chokra ghanti chate ane upadhyay ne aato – means our own kids at home are starving and then we welcome visitors. We should not be doing it. Investor is invested, whether it’s domestic or global, we should treat them equally.
Second thing, just reducing taxes does not guarantee return. What if tomorrow, FPIs is demand guaranteed return will be come to it? I don’t think so. We should be focused on creating earnings growth and governance. We have delivered better return than all the emerging markets put together. We have delivered better return than China, Brazil, Russia, South Africa. Yes, last seven months have been bad, but people have made money over here, and on that money they are paying taxes. So it’s not easy answer.
People who are demanding lower taxes for FPIs are probably also demanding stability in taxation policies. Once they know that there is ex- amount of rate to be paid, they want that to remain constant for a long period of time. There is no easy answer, but my recommendation will be treat all investors alike, whether it’s foreigner or whether it’s local.
