Over the last few months, there has been relentless selling by foreign institutional investors from the equity market, in the backdrop of strengthening dollar and rising trade and tariff-related uncertainties following the return of Donald Trump as US President. Between just January and February 2025 (up to February 24), foreign portfolio investors have sold a massive Rs 1.05 lakh crore in stock market, driving the stock markets lower. And analysts believe the selling may not be over yet.
In the backdrop of the huge FII selling, India's benchmark NSE NSE 50 index has tumbled over 14 per cent from its life high. Mid and smallcaps have fallen even more, with the Nifty Smallcap 250 index down 22.7 per cent from its peak, as of closing on Tuesday, February 25.
In spite of the correction, the Nifty 50 remains "some what" expensive at 19 times March 26 price to earnings ratio, which is significantly higher than historical averages, noted Pratik Gupta, CEO and co-head of Kotak Institutional Equities.
"This is especially high considering earnings CAGR of 14 per cent in FY2026 and FY2027, with downside risks to such estimates. Hence, we don’t expect meaningful upside to the Nifty in the short term," said Gupta.
He is more cautious on the small and midcaps due to "expensive valuations in most cases."
"We have been negative for a while now and despite the 13 per cent and 18 per cent year-to-date correction in the Nifty midcap and Nifty smallcap index, we don't believe valuations have come down enough," said Gupta.
Even as the FIIs have been selling heavily, some of that has been offset by the continued buying by domestic investors, especially through mutual funds. So far despite the correction, mutual funds continue to see net inflows, although there has been some slowdown.
According to data from Association of Mutual Funds of India (AMFI), equity mutual funds saw inflows of almost Rs 39,688 crore in January 2025, down 3.6 per cent from the inflows of Rs 41,156 crore seen in December 2024.
Gupta noted that mutual fund executives in Kotak Institutional Equities' recent annual investor conference indicated that the nature of the flows have been shifting away from small and midcaps and sectoral and thematic schemes to large cap funds and balanced funds.
Other then the global geopolitical and trade tensions, a major concern among investors has been India's slowing economic growth. Earnings growth too has been lacklustre and things are expected to weak in the next two quarters too.
"The slowdown which we are going through right now looks like even the March quarter and perhaps the June quarter may also be a bit, you know, you could see weak-ish kind of earnings coming out," said Gupta.
Overall, the mood among investors in Kotak's conference was somewhat "cautious" and "pessismistic," he noted.
High valuations, economic slowdown and tepid earnings apart, the high bond yields in the US have also driven a lot of money flowing out of emerging markets, including India, back to the safety of the dollar.
What will change the FII mood? Maybe, if markets were to correct further, valuations would start looking more attractive, or India's economic growth outlook could improve or the US dollar could weaken, prompting asset allocators then re-look at investing in emerging markets. However, none of this is likely in the very short-term.
"Many emerging market (EM) fund managers were hopeful of inflows into EMs as an asset class later in the year as the valuation disparity with the US equity markets had become very high, but they did highlight that India would not be their first priority given slowing growth and relatively expensive valuations as of now," pointed Gupta.
Overall, Gupta expects the NIfty 50 index to remain largely range-bound this year.
The equities firm continues to like large private banks and non-banking finance companies, life insurance firms, residential real estate and hotels and airlines. But, it remains cautious on many of the consumer staples and consumer discretionary stocks as well as the oil and gas and chemicals sector.
