FIIs who are leaving have made a profit but that is not the reason they are going: Sunil Subramaniam

Sunil Subramaniam, Market Expert, says global uncertainty is high, with daily announcements from Mr. Trump. The strong US dollar and high interest rates make investing in the US more attractive. If Trump's team resolves the Russia-Ukraine conflict, Foreign Institutional Investors (FIIs) may return, triggering a significant relief and risk-on rally, benefiting India the most. This is a key factor for attracting FIIs to invest in India.

The finance minister is downplaying the heavy FII outflows as mere profit booking after making handsome gains. Do you agree with that assessment or do you think there are deeper concerns?
Sunil Subramaniam: I agree with the fact that they are going out making profits. Now whether they are going out because they made profits is only something an FII can answer. But the FIIs have been selling since September. September to now, the Nifty has lost 6%. So, they are the ones which caused the loss by their selling. So, the guys who went in September, October, November, December all made handsome money because the rupee has depreciated only about 3%. So, even net of rupee depreciation or in rupee term, they would have still made a profit, but I would also like to not club all FIIs as one way, that is not short term.

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Longer term, FIIs like sovereign wealth funds and pension funds and insurance funds, active mutual fund managers who are three to five years. After the correction for the last six months, it is 6% today. Today, in one year, the Nifty is still positive 4%. So, people who came back in one year and left today still made 4% positive. Yes, the currency would have taken away that, but he would have made a marginal profit. Now, over two years, he has made 28% absolute return and the three-year return is 32% even today after the correction.

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So, an FII who came in three years ago and is leaving today, even he, has made a profit. So, I agree that no FII is going to go out at a loss. He will wait for his time. So, the people who are leaving are making their profits and leaving. Now, are they leaving because they have made enough profits? I do not think so because they are seeing better opportunities in a risk-free US debt trade where the government is giving 4.5%. In the private sector, you probably get arguably better returns without currency risk. The opportunity spaces are better.

Clarify this for us, when exactly do you book profits? What are you expecting to happen in the future? Is it because other markets are looking that much more attractive or because you see a downturn coming?
Sunil Subramaniam: So, two things; in November-December, hedge funds book profit in order to pay their fund managers bonuses. So, where did they make the best returns? In December, Indian markets had given very healthy one-year, two-year, three-year returns. So, that November, December, those fund managers who booked profits were booking profits to receive their bonuses.

Now, the second aspect is yes, sometimes fund managers do book profits if they see a downturn and they fear they will lose money. But India, even in a downturn, with a 6.5% growth rate is the fastest growing country in the world. So, it is not like India is going into a bear market.

We had a couple of quarters of slowdown in GDP growth, and everybody knows why that happened. The government took its foot off the pedal on capex and retail consumption suffered because of inflation. These are not permanent things. These will bounce back in time. Right now there is global uncertainty. Mr Trump is coming out everyday with something new. The US dollar strength and the US interest rates being at a very high, give them a very profitable opportunity to invest back in the US market. So, just about the opportunity being better there.

These FIIs are not moving out just to their home markets. They are also going to other global destinations. Is it about India becoming less attractive than it was because there are valuation concerns and global liquidity shifts? What are the real reasons you see?
Sunil Subramaniam: Most emerging markets have suffered losses. Which is the emerging market which has made money, tell me? I think it is not true that they are taking from one emerging market to another. In September and October, China announced a stimulus. So, some money which moved there expected China to bounce back, but that would be a false alarm and the stimulus really did not come through.

I do not think that any FII is pulling money out from India as an emerging market and putting it into another emerging market. That happens when oil prices shoot up; then commodity exporters like Russia, Brazil, tend to get an allocation away from India, but that has not been the case. Oil has been pretty stable and flat and with Trump doing drill baby drill oil is expected to remain flat. I do not think at this particular point in time, though FII profit booking is taken from one emerging country like India to another, it is only either to go back to the US in debt or in US equities, I do not think there is any other plausible reason at this point in time for FIIs to sell down. India has not gone into a long-term growth decline.

You mentioned year on year how we have done as far as the index is concerned, but this year we have slipped more than three percentage points. What level should investors watch out for? There is current volatility and that is something that the DEA secretary is also alluding to but he says this is short term. Do you believe that as well or are we in for a deeper correction? Or is this just going to be a passing phase before we get another leg up?
Sunil Subramaniam: I think that from a foreigner's perspective, one of the ways to look at valuation is the market cap to GDP ratio. We are at about 112% now and generally between 90% to 115% is considered slight over valuation. So, despite the recent corrections, the Indian market is still slightly overvalued. So, another 5% correction would take it down to the realm of reasonable and the Nifty also one year forward PE is hovering around 21, which is just above the long-term average.

So, I do not think you need to wait much longer, maybe a 5% more correction due to FIIs and then Indian markets will look reasonably valued at the largecap end. The mid and smallcaps, of course, the pain factor is different but FIIs are not concerned about that.

You think FIIs are coming back in a rush?
Sunil Subramaniam: FIIs will come back in a rush if a solution is found for the Russia-Ukraine war by Trump's team. Then there will be a huge relief rally and a risk-on rally and India will be the biggest beneficiary. That is the big trigger which will make FIIs line up to invest in India.