There is one thing that can be said with certainty about the short-term movements of the stock market: that would often surprise. The ongoing rally in the domestic market that has taken the Nifty to above 18000 from the June low of 15187 has taken even the bulls by surprise. This near 19 percent rally from the recent lows has made India the best performing large market in the world. As on mid-September S&P 500 is down 18 percent YTD while Nifty is up 3.6 percent YTD.
How do we explain this outperformance?
FIIs have turned buyers
One of the major factors that caused the sharp correction in the Indian market from the October 2021 record high of 18604 to the June 2021 low of 15187 was the relentless selling by FIIs. Now FIIs have completely reversed their strategy: from relentless selling to strong buying.
India has the best growth and earnings story among the large economies of the world for at least the next couple of years. That’s why FPIs are buying in India now even when the US 10-year bond yield is above 3.4 percent, and the dollar index is hovering around 110.
Retail investors supporting the market
Retail investors in India have been a source of great support to the market in this challenging environment. Retail investors investing directly and through mutual funds have emerged as a major countervailing force to the FPI ‘hot money’. If we take the period from July 2021 to June 2022 FPIs sold equity worth Rs 409221 cr through stock exchanges. This massive selling didn’t impact the market much since this period witnessed DII buying to the tune of Rs 328493 cr. (Source: NSDL). The number of demat accounts surging from 40.9 million in March 2020 to above 100 million in August 2022 reflects unprecedented retail investor enthusiasm. This has stood the market in good stead.
It is important to understand that retail/DIIs are the dominant players in the market now. The share of retail investors, DIIs and FPIs in the daily cash market volume in the exchanges are 52 percent, 29 percent and 19 percent respectively. Retail/DIIs are in a formidable position unlike in the past when FPIs used to call the shots. Retail has been buying every dip in this market and DIIs flush with funds have been absorbing the massive selling by the FPIs. This new market paradigm has altered the rules of the game.
India’s growth prospects look promising
The three drivers of global growth – the US, China and Euro Zone – are slowing down. Global growth in 2023 will be lower than in 2022. India is a bright spot with improving growth prospects. Bank credit growth is currently running at around 16 percent; bank NPLs are at 10-year lows; India’s capacity utilization is above 75 percent and investment is picking up. All these bode well for markets.
Prudence demand caution
Even though the market momentum is strong and a new record high in headline indices are possible, investors must exercise some caution since the market has run up too much too fast in this challenging environment and, therefore, high valuations are a concern. Even while remaining invested, some profit booking may be considered. At the current market juncture, safety is in domestic economy-facing segments like financials, automobiles, capital goods, construction related segments and telecom.