The markets are doing really great. Benchmarks as well as the broader markets are throwing up good opportunities. But no matter how much strength the Indian markets show, the foreign institutional investors are not coming back. Do you think the nervousness of FIIs is temporary and they will also come back to Indian markets just like the DIIs?
Sunil Subramaniam: Yes, I think so. Over the last six months, there has been so much geopolitical uncertainty, apart from the tariff situation where it does affect India. The Indo-Pak war was India specific and then even in the Israel-Iran war, there was the oil price spike and the fears around that. As a result, internationally, there has been news which has given rise to concern on the short-term implications of this geopolitics on India.
That is why compared with the previous time when the Hamas attack or the Russia-Ukraine war, FIIs were not so nervous about the Indian markets, because it was a distance away from India. But this time, it is closer to home, especially considering oil. Now that a ceasefire looks very probable and so from the fact that right from the budget onwards, we have had only positive news around the India front coming through. But the FIIs have not been able to take advantage of this because they were worried. For example, oil has a big impact on multiple sectors, fiscal deficit, everything.
So, when you look at an FII, they largely look at India as a stock. And when you put in the risk factors in the stock, oil has a big weightage there and it is very hard for an individual FII to go against the numbers because they do a lot of algorithmic trading. The computer feeds in a lot of negatives about India which are perceived to be negatives. And until they get clarity, they cannot take a call.
But now that the oil situation looks to be easing from an uncertain point of view, I think the FIIs are poised to come back to the country in a reasonably big way. But there still remains one uncertain event which will probably be the final trigger post wherein I expect a flood of FIIs money to come in and that is the signing of the BTA.
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I think there is still uncertainty because the US has gone ahead and signed with the UK. They have kind of done a deal with China. But with India specifically, there has been a lot of action, a lot of bilateral trade meetings happening, both the initial Modi-Trump meeting and even the latest one, Mr Trump said, oh, I am going to do a trade deal with Modi, but it has to be signed and delivered. Meanwhile, in July, the 90-day pause is coming to an end and to that extent, FIIs will still be a bit cautious because they would not want to take a sector call.
In which sector will India come out a winner and where the US will extract some concessions from India is still out in the open. So, they would not like to take that risk now and they would rather wait for the uncertainty to go away before they come back. Otherwise, domestically there is nothing that is a hindrance to their coming in, a very supportive RBI through multiple actions, a supportive fiscal action through putting money in the hands of the middle class, a good monsoon forecast, as well as the ground level GST numbers, the PMI numbers all of which are coming positive.
That is why domestic fund managers this month have deployed their cash in a big way. They were also uncertain through the earning season up until the end of May, and now those earnings have come out, it seemed that sequentially all the earnings have done better. Yes, against expectations, it was mixed, but at least that uncertainty is over now.
I want to understand one of your comments which you made on the oil front. You said the situation has eased, and even the price is reflecting that. But in sectors like paints, aviation, what outlook do you hold now? Is it the right time to enter or should one wait and watch?
Sunil Subramaniam: When you look at it purely from an oil related perspective, you would say an easing would make sense. But the point is that only one part of aviation, the paints, is the demand side of the business and there is no concern. I see aviation demand really going through quite well and then, you have also seen paints as a part of discretionary. I expect it to do well with the housing sector gaining momentum. So, yes, given that this uncertainty has led to some volatility in the price, it is a good time to accumulate those stocks.But having said so, if one is considering creating a portfolio, doing investment for a longer term, how should one create a mutual fund like portfolio in this market uncertainty. Yes, the undertone of the domestic market is certain, the undertone is bullish, but what are the sectors one should consider?
Sunil Subramaniam: I would put this into two buckets. The first is the portfolio for a one, one-and-a-half year period and second is a portfolio for a three, five, seven-year period. The reason I am separating these two out is because in the short run, there have been sectors which have underperformed over the last six months and I expect them to play a catch-up, especially where FIIs have interest because as we just spoke, I expect FII return to happen in a big way post the BTA signing.
So, from a shorter-term perspective, my vote would be to go for IT. I have been saying that for the last couple of weeks. On a six-month basis, the underperformance of the Nifty IT index is about 10% to the Nifty, whereas just a few weeks ago it was 17%. So, already there has been a 7% catchup rally. I expect this to sustain and for it is a next one-and-a-half-year call. IT is a big pick.
The second would be private sector lenders whether they are private banks or good quality NBFCs or even gold financing and other companies because the impact of the tax breaks plus the RBI rate cut in terms of reducing EMIs will be felt within the realty, auto, consumer durable space and there the private lenders will do well.
