3 min read.
Dear Investors,
I hope you are doing well. As you may have observed, the markets have been experiencing bearish sentiments over the past few months. The pace of Indian equity sales by foreign investors has led to various indices correcting between 10% and 20%. Our view on this situation is as follows,
Since the inception of the markets, bearish cycles have been a normal and unavoidable part of equity investing. Holding strong conviction in the markets during these cycles is absolutely integral to long-term success. These are instances where the age-old saying of ‘Time in the markets being much superior to 'timing' the markets,’ is reaffirmed.
It is important to note that while FIIs have sold Indian equities, domestic institutions have been buying them in record quantities—₹5.5 lakh crore in this financial year alone, the highest ever in the history of our markets!
Regarding FII sales, some interesting data points that stand out. The highest quantity of FII selling in India (over the last 20 years, excluding the current FY) was in FY22, at roughly ₹2.75 lakh crore. Interestingly, during that year, the Nifty50 gained 19%, and the SmallCap index rose by 32%!
This suggests that it is not the quantum of sales but the pace of sales that is problematic in the current FY. As per our estimates, DIIs can comfortably absorb about ₹30,000–35,000 crore of FII sales per month. However, in January, this number spiked to nearly ₹90,000 crore before declining to ₹30,000 crore in February so far.
According to today’s (20.2.24) Business Line, about 80% of the portfolio management industry is holding less than 10% cash in their portfolios, indicating confidence in a market recovery. Our PDF currently holds around 13% cash. To further support this perspective, market indices are trading below their long-term average price-earnings multiples. It is important to build conviction from broader market consensus rather than attempting to time the markets based on outlier data.
While factors such as rupee depreciation or US bond yields cannot turn favorable overnight, our valuations can certainly become more attractive, applying brakes on FII sales in a relatively short duration. A pickup in earnings and GDP growth is anticipated over the upcoming quarters.
To conclude, we remain highly confident in the strong fundamentals of the companies we hold. These inherent strengths do not fluctuate with market sentiment. Our portfolio companies indicate strong growth for the upcoming quarters, with well-laid-out expansion plans over the next three years.
While the Nifty or Sensex may not gain 10% in a matter of weeks, the broader markets are fully capable of achieving such a move in just one good week. To capture this, it is best to stay invested in fundamentally strong companies with a 3 - 5 year perspective —something we consistently endeavour do at PWM!.
Kind Regards,Vasudev Gupta
MD, Prosperity Wealth Management
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