ETMarkets Smart Talk: $22bn of FII outflows in first 5 months of 2022 signal a good time to buy Indian stocks: Sahil Kapoor

“The rolling 12-month FII flows are the most negative on record. FIIs have sold stocks worth $22bn in the first 5 months of 2022, a record in itself.,” says Sahil Kapoor, Market Strategist & Head – Products, DSP Investment Managers.

In an interview with ETMarkets, Kapoor said: “History says when FII outflows rise to such levels, it’s usually a good time to buy Indian stocks,” Edited excerpts:

What is your take on markets in the short to medium term?
The frontline indices as well as the small & midcap universe tested not only important support levels but also their long-term valuation levels.

The last 7 months of grinding correction have brought down the valuation multiple. For instance, the Nifty P/E has fallen from nearly 24 times to less than 19 times when it traded below 16,000 levels recently.

On a trailing 12-month basis this is the average at which Nifty has traded over the last 10 years.

With the renewed uptick, it’s quite likely that the Nifty has embarked on a journey to higher levels given that earnings growth is well supported by steady improvement in the Indian economy.

We must be watchful of slowing global growth and volatile commodity prices. The risk from higher oil prices is still as much as it was since the Russia-Ukraine war broke out.

How should one play the small & midcap space now? Can we say that the broader market is in a value zone?
This space has traded below its long-term average valuations. This is also a function of uneven and volatile earnings recovery in this segment.

The Nifty50 Smallcap 100 Index and Nifty Midcap 100 Index are now trading below 18.5 times and 19.5 times trailing earnings.

It does appear that one from a long-term perspective this is a time to invest in this space consistently. Also, within the broader universe, ~50% of the NSE 500 stocks have corrected more than 30%, indicating a lower valuation froth now.

This has created selective opportunities in the market. Only 20% of NSE 500 stocks are above their 200 DMA, vs a long-term average of 50%. Markets have usually turned upwards from such readings.

Do you think that the world is heading towards a recession?
Major economies are facing substantial headwinds, but domestic growth has been resilient. Even if decoupling is not a possibility, the impact on India from external headwinds is likely to be small.

Since India didn’t have massive dole-outs during the pandemic, the current growth is not on crutches and is partially shielded from any policy withdrawal syndrome.

It’s quite likely that even as global growth slows, Indian growth may remain resilient and may not slow as much.

What is your take on consumption as a theme – do you think it could take a hit amid price rise and possible fall in demand?
Historically, Indian consumption has been the bedrock of growth. Usually, during the periods of price pass on, like the one we are witnessing, there is a growth consolidation that takes place.

We are also witnessing growth across categories normalizing after an uneven recovery post Covid. This means consumption is likely to remain steady growing at a steady pace.

We are not expecting a fast pace of growth, but a steady trend is the most likely outcome at this point.

Sectors that could relatively be safe bets in rising interest rate scenario as well as rise in inflation?
We continue to remain overweight in banking and financial services, autos and ancillaries, healthcare and some construction materials whereas we remain underweight in IT and metals.

The BFSI segment has been an underperformer over the last 3 years. Credit growth has begun to pick up. For instance, the annual incremental credit that the economy can absorb at the current growth rate is nearly Rs 12 to 15 trillion per annum. At this time this number is at Rs 5-6 trillion..

This means that markets are still underpricing the possibility of stronger credit growth in the banking and non-banking space. We expect the credit growth to pick up to double-digit growth from the current 8.5%.

The core economy is also improving at a fast pace. The business resumption index is now hitting high readings which means core Indian economy is back on track.

A combination of healthy govt and private spending, normalization in private consumption, and a stronger demand trend from channel checks indicate that core sectors like Industrial Products, Cement, and Auto & Auto ancillary are seeing gradual improvement.

For instance, the Passenger vehicle segment is now likely to recover from a slump that took the PV sales to lows seen 10 years ago. Hence, we remain focused on buying businesses that are more locally linked than those which are linked to global growth or commodity prices.

What is pushing FIIs away from India and is it the story for other EMs as well?
Every time Indian stocks witness large FII outflows, this causes some dislocation in valuations and ownership trends. In the past, large FII outflows have coincided with deep cuts for Indian stocks and bear markets.
This was because local ownership of equities was small. Over time, domestic institutional and Indian households have increased their equity holdings providing a cushion on markets.

At this time the rolling 12-month FII flows are the most negative on record. FIIs have sold stocks worth $22bn in the first 5 months of 2022, a record in itself.

History says when FII outflows rise to such levels, it’s usually a good time to buy Indian stocks.

The return of FII inflows will depend on two factors. Firstly, a better earnings growth trajectory than peers and a more resilient emerging market picture.

I reckon that in H2 of 2022, both these factors could be supportive of FII inflows than of aggressive outflows.

What are you factoring in for other forthcoming quarters in terms of earnings? Looks like we could see more earnings downgrade compared to upgrades and the whole theory of earnings revival may take a hit. What are your views?
Our earnings projections have been conservative from the beginning of this year. We believe that FY23 could see an earnings growth of around 13% to 15%.

Accounting for a wave of downgrades and sectoral changes this number looks achievable.

How should one position their portfolio in terms of equity and debt part? Is it time to go slightly underweight on equities or neutral?
We believe it is the right time to use price declines to long term averages to up your equity exposure. A slight overweight stance to equity could help in the current environment.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)