If you want to invest in the current fall, you should know why FIIs are selling India, when the FII selling will stop and then you can invest wisely.
The answer is YES. Investors should buy into the fall of June 2022 but what is more important is to know what to buy and when to buy.
So let me answer the question for you.
Why is the market Falling?
The market is falling because, in India, FIIs sell almost 4k crore of equity daily. It started in November of 2021 and has been the trend for the past few months.
The reason we see such a massive sell from FII is because of many global factors like:
- Quantitative Tightening in the US
- The rise in interest rates in India and the US
- The High Inflation Globally
- Russia Ukraine War
Some may even consider the US recession as one of the reasons. However, I can’t entirely agree with this point because each time there has been a recession in the US, the Indian market has rallied in the following year.
The reason is that when the US is in recession, OIL and other commodities cool off, which helps India.
Why are FIIs selling India?
US interest rates are one of the reasons for FIIs to sell India.
I think FIIs may have leveraged positions at significantly cheaper rates. What it means is they have taken loans and moved the funds to India for better returns.
When the rates rise, their loan EMIs will increase. So they are selling to reduce their liabilities.
As I see it, the second reason to sell India is valuation from return. Investing in equity is not very lucrative compared to US bond market returns. So when FIIs can get similar returns investing in US bonds, they prefer US bonds.
You may argue 3% return in the US bonds and 12 to 15% return from investing in Indian equity, and why will FII prefer US bonds.
FIIs are interested in dollar denomination returns. So when they bring dollars in India and when they take out, the differential in the USD INR must be kept in mind.
From 2010 to 2020, USD INR has moved from 45 to 75 or roughly 6% CAGR.
So 3% returns in the US are better because of USDINR hedging. So when India has overvalued them, selling made sense for FIIs, but it should stop sooner than later.
Should I Buy into the Fall?
The right question is, which of the above negatives will continue for the next 3 to 5 years?
So now ask yourself these questions and see what your answers to each of them are?
- Will FII sell 4k crore in the equity market daily for the next three years?
- Will Quantitative Tightening suck up every dollar printed in COVID times?
- Is inflation out of control no matter what we do?
- Will the rise in interest rates continue for eternity?
- Will Russia continue to fight with Ukraine for years?
If all the answers are NO for you, the time is right for you to accumulate great companies. Companies will continue to grow their earnings for the next three years, but the share prices may not rise as much as earnings because of selling pressure from FIIs.
When will FIIs selling STOP?
NIFTY around 15k, and with TTM earnings of ₹800, it is trading at a trailing PE of ~18.75.
Indian GDP is expected to grow at 8%, so a 10% increase in earnings next year is a very conservative target.
So the Nifty is trading at ~17 times one year forward earnings.
Historically 17 times one year forward earnings are considered a reasonable valuation for investing in India. So FII will not continue to sell India for very long.
Overvaluation in India means FIIS will not make many returns in dollar terms. However, when the returns increase to 15% in India, FIIs will surely return.
Indian markets are coming off from overvaluation. So, I think the selling from FII is likely stop sooner than later.
The Nifty bottom may not be far from the current levels of 15k.
The question – What to Buy and When to Buy?
I think NIFTY at around 15k is a great investment opportunity.
Companies that will continue to grow their earnings for the next three years are the right stock to invest in.
I think the next six months should be a great time to invest.
So whatever fund you are left with or want to invest, divide it into five parts and put them in the market for every 3 to 5% fall in NIFTY.
Finally, I have to ask. Where are you investing? Share your thoughts in the comments