Share your thoughts on, once again rise in the geopolitical tensions and its implication on the markets, especially the Indian markets, because we have, of late, seen that the markets do climb the wall of worry and we have seen so many instances especially in the past two years.
Sunil Subramaniam: I think that is due to the strength of domestic liquidity. If you look at the numbers for the mutual fund industry, for example, flows have been consistent and I think net flows were just below 20,000 last month. But if you see the gross flows, they have been stable at around 55,000 crores.
So, I think that and the SIP book coming in at about 26,000 crores means that fund managers have got adequate liquidity, but the nature of that liquidity is a little more tilted towards mid and smallcaps that is why you have been seeing that consistently when global events have been happening, FIIs have tended to get nervous, especially this time because of the oil spike they have tended to pull money out from the market, but domestic fund managers with ample liquidity have stepped in. And what reinforces this is the fact that the domestic economy is chugging along well.
So, the domestic economic news is good, domestic liquidity is strong. So, FIIs will be nervous because they apprehended that Iran would do something with the Hormuz Strait and they expected oil to shoot up. But as we saw during the course of the day oil was fairly stable, only hitting about 76, so I think that there is enough supply, though 20% of the world’s oil goes through the Hormuz Strait, Iran’s oil that also goes through, if Iran is going to sustain the war, they cannot shut their own ships from going, so to some extent there was a little bit of a knee-jerk reaction to that.
Oil may still trend higher based on what Iran does, but I think that FIIs nervousness related to oil to India is driven by the 85% import that we have of our oil requirements and the fact that the currency will tend to weaken making all our imports more expensive.
So, this is something that foreigners when they look at it as a comparative play among various countries, they feel that India they can take money off the table. But domestic liquidity even this month has been fairly strong. It is more than 60,000 crores of buying just by mutual funds, that is the reason that every such dip is viewed as a buying point. And these fund managers had their liquidity building up over the last two months because while the earning season was in progress, they were not fully deploying. So, at the end of May they were sitting on pretty decent amounts of cash and I think that has come through to the market this month. So, I think that situation will continue. You will see volatility in the market because geopolitics obviously creates nervousness in foreign investors, but domestic fund managers are tracking individual sectors and stocks and when they see the FIIs selling brings down those values closer to the average.
Indian markets are not cheap still. We are still trading at a fairly rich premium, I would say, to other emerging markets and maybe at a Nifty PE of 21 we are just above the long-term average. So, we are not cheap yet. But fund managers are tracking sectors and when they see dips in certain sectors because of this selling, they will step into buy.
So, I see a period of consolidation in the market but there would not be a deep fall because there is enough liquidity to support. Any stock price which corrects sharply, there will be buyers found in the domestic scenario.
I wanted to get your perspective on the kind of market reaction that we are seeing especially on the US futures front. Do you believe that this escalation is now largely being priced in by the market and not much can go wrong from here at least from the market point of view.
Sunil Subramaniam: US has also threatened further strike, so what it means is that the likelihood that Iran’s defensive capabilities gets crippled because Israel is also now attacking their missile bases after attacking the nuclear bases earlier. So, what it means is that they see this as that Iran has not much choices and that enough pressure could be brought in through China on the Hormuz Strait issue. Markets are reflecting that because almost entire Iranian production is sold to China. So, clearly, China is an important factor there. So, what the markets are realising is that the surprise action by the US and the threat of further action would probably keep this from escalating because Iran is getting crippled day by day by these joint strikes. But even with the threat of a Hormuz closure, it has stabilised at around 76. So, overall, the world is absorbing the fact that US will ensure I think by further attacks that actually Iran may not be able to do much. It is a kind of a read that is happening.
And to that extent the world has also got used to these geopolitical shocks. So, no longer are the reactions as extreme as we saw when the first Russia-Ukraine war broke out or when the first Hamas attack happened on Israel.
Now, the reactions are far more subdued because people are realising that these things do not last very long, so that is the fact. The fact that the market expects that maybe in a couple of weeks or a month or so this situation would be behind us. So, market is tending to read into the future and as they say, you buy on the rumour and sell on the fact. So, the fact that the action has happened has eased the thought processes of the market a lot.
