PL Capital, formerly known as Prabhudas Lilladher, has suggested that foreign portfolio investors (FPIs) may potentially sell another ₹1 lakh crore worth of assets. The brokerage firm conducted a study revealing that when India’s market capitalization peaked at ₹450 lakh crore, FPIs held shares worth ₹80 lakh crore.
Drawing comparisons from previous cycles in 2008 and 2012, PL Capital estimates that FPIs could sell approximately 1% of India’s total market cap or 5-5.5% of their peak holdings. With FPIs already offloading shares worth ₹3 lakh crore, the total selling could reach ₹4-4.5 lakh crore based on their calculations.
On the flip side, can domestic institutions counter this potential selling pressure? According to PL Capital, inflows from systematic investment plans amounting to ₹26,000-27,000 crore annually could facilitate the purchase of shares worth ₹3.25 lakh crore. Additionally, inflows from entities like the Employees’ Provident Fund Organisation (EPFO) and Life Insurance Corporation (LIC) could potentially allow domestic institutional investors (DIIs) to buy shares worth ₹4.5-6 lakh crore, provided there are no redemptions and the flow of funds remains consistent.
Despite strong domestic demand, the market faces uncertainties stemming from factors like tariff wars and delayed interest rate cuts. This suggests that market consolidation is more likely than a sustained rally or a sharp correction. Ongoing FPI outflows and valuation concerns may limit upside gains, with sector rotation indicating that cyclical stocks could outperform defensive stocks in the near future.
The Nifty 50 index has retreated 12% from its all-time high of 26,277 in September 2024, driven by global uncertainties, lackluster earnings growth, and elevated valuations. Mid and small-cap indices have witnessed even deeper corrections, with the Nifty Midcap 150 down roughly 18% from its 52-week peak and the Nifty Smallcap 250 down approximately 23%.
Although there has been a correction, mid-cap and small-cap stocks continue to trade at higher valuations compared to their 5-year averages. Large-cap stocks are trading below their 5-year average price-to-book (P/B) ratios, while mid & small-cap stocks are trading above their 5-year averages, indicating a normalization of valuations.
In summary, the Union Budget has been a positive development, while the ongoing FPI selling remains a concern. The market is likely to witness consolidation amid global uncertainties and valuation challenges, with a potential for sector rotation and a focus on cyclical stocks in the coming months.
