What is your reading of the set up now as the FIIs seem to be intensifying their selloff?
Ajay Bagga: If you look at the global scenario also, China post the stimulus got a good amount of money, nearly $53 billion of inflows in two weeks. But in the last three weeks of October, China has seen outflows of nearly $15 billion. So, it is outflow from emerging markets overall, Mexican funds have seen outflows with the fear of a Trump return to presidency hanging on that market, Latin American emerging markets and Asian economies have seen outflows.
So, one, it is a global phenomenon. Where is the money going? It has been going into US markets and Japanese markets. Even the bigger European markets have seen outflows and if you look at what the markets have had to contend with in a political sense, you have had an underwhelming election in Japan, which raised a lot of uncertainty. But the markets interpreted it positively that the Bank of Japan will not move that fast on raising rates thanks to this political uncertainty and the Japanese market continues to see inflows. The UK budget is raising taxes by 51 billion pounds, which is nominally a negative for the economy, for corporate earnings. And we have seen 42 weeks of outflows.
A discussion took place here in the studios of ET Now, which is a belief that technical charts seem to suggest that this is a crucial level, 24,000. But if the financials hold out, in these volatile times, then perhaps we can expect a base formation and a bounce back. Do you see that happening?
Ajay Bagga: If you remember, 24,800 was a very concentrated support level for Nifty and it broke through that. So, charts work till they do not work. I believe in fundamental analysis, but what little I know of technical analysis of these very strong support zones, when they are broken, it does not get healed that fast. But I feel that the markets have discounted a lot of weakness for the corporate earnings. Most of the disappointments of the second quarter are now reflected in the share price. Now, does it go down from here? Markets are always excessive. Until we see a stop to the FII outflows, you cannot really have a bottom formation in the Indian markets.
You were also saying that there are inflows into the US markets. You mentioned the Japanese elections. The outcome was not known. There was this kind of indecision that was floating around, that too is the case in the US elections right now because you said a Trump victory is perhaps what the markets are afraid of. There are certain people who believe that a Harris victory is what the markets are afraid of. But one wonders why there is inflow in the US markets when there is uncertainty.
Ajay Bagga: No, the Mexican markets are afraid of a Trump victory. So, there were outflows from the Mexican markets. The US market is seeing a Trump trade, which is positive for the stock markets, which is that higher bond yields, higher inflation, lower taxes and less regulation are good for corporate earnings, that is the Trump trade that is good for cryptocurrencies. So, you are seeing a billion dollars a week coming into crypto ETFs. So, the Trump trade is very strong in the US markets.But tell me about the outcome of the American elections. They would perhaps be reflected in the Fed’s policy because that is where the markets are getting nervous as well. How the Fed is going to move and would depend on who the next incumbent in the Oval Office is.
Ajay Bagga: Yes, and if it is Trump, then you could have a new incumbent in the Fed chairperson’s office also very soon, so that is there, 10,000 new appointments will happen with the change in regime. It is not like the Indian bureaucracy where the IAS, IPS, IRS, IFS stays in place and the politicians change, the 542 Lok Sabha politicians change and the Rajya Sabha, and the bureaucracy goes on and on.
In the US, winner takes all kinds of a market, 10,000 new appointments will happen with the Trump presidency. With Harris, Obama and Biden will largely decide who comes in. So, there could be some continuity for some time and it would not be so disruptive. So, the Trump presidency is going to be disruptive policy-wise. Now, what happens with the Trump presidency immediately? The biggest problem facing the US right now is the debt amount and the fiscal deficit. He is going to inherit a very good economy. Out of the last four presidents, three have inherited a recession. So, Biden in 2020, Obama in 2008 and Bush in 2000, all three inherited bad economies, only Trump got a relatively good economy in 2016 and again in 2024, Trump or Harris inherited a good economy. But what are the three big things that the voters are talking about? First is the economy, so the economy has not been equal for everybody. Asset holders have done very well. Stock ownership investors have done very well. Real estate owners have done well. But a large portion has not benefited from the surge in the economy. Second is inflation. And third is immigration. And there on all three, Trump scores higher than Kamala Harris.
So that is a moving piece for sure and that is definitely going to have an impact on how our markets move, at least this week. But one belief is also that a lot of liquidity that we have been talking about, that we are not bad on the liquidity front in our end of the world, but it has been sucked into the many IPOs that have hit the markets. Do you agree with that?
Ajay Bagga: Yes, we have had a new paper. If you see the promoter selling has been about Rs 2 lakh crore plus in this calendar year and IPO, FPO, QIPs and OFSs have raised another Rs 2,30,000 crore. So, nearly Rs 4,50,000 crore has gone out in terms of new paper. DIIs have put in nearly Rs 4.9 lakh crore in the market, so they have absorbed the paper plus the retail Indian investors. FIIs have contributed a very minuscule Rs 17,000 crore in this whole supply of paper.
So, that has been a drag and the second thing is Vikram, normally when you see such a huge outflow, like Rs 1,14,000 crore in October in the secondary markets, when you see such a large outflow in the following months, normally on a flow sense, you see a reversal because you cannot really…, the market will not be able to absorb. Even the ammunition with mutual funds would have got exhausted to some extent.
So, if the FIIs press another one lakh crores in November, then there is no level for the market. It can fall very sharply. We saw that today in terms of FIIs selling being higher than the DIIs selling and we saw the sharp correction in the market. So, as the DIIs take a backseat and they let the FIIs sell, you could see markets correcting faster and that will be a self-healing process.
But it could be a long self-healing process, right?
Ajay Bagga: No, it will be faster. Because DIIs, when you keep on absorbing, you give an exit to the FIIs. What happens? I have worked in foreign companies. Frankfurt or New York will send you an order, everything must go. They are not bothered. And I have run domestic funds. When we are selling, we will be very careful that we do not move the markets. When the order comes from the head office, everything must go, generating this liquidity. They are not bothered about the impact cost, that is the big difference. When you keep on giving them an exit, it is a slow cut. But when DIIs do not have the ammunition, they stand back, you will have such a sharp impact cost that the market becomes self-healing and the valuations all of a sudden start looking good.
But can you say that about the auto sector because that is a key consumption theme? The October dispatches seem rather muted. So, if festive cheer does not seep into auto sales, then how should we read into the sector’s performance? What do you bet on – the defensives?
Ajay Bagga: Defensives, you are spot on. You will have to see areas where you can see growth over the next one year, two years. I think in terms of, what will happen to a large extent over the next five months, including November, government spending will increase, that will lead to a multiplier coming back in the economy.
In consumption, you will see recovery happening. Infrastructure, more projects coming in and consumption will, with a lag, start picking up. About 35-40 lakh weddings are coming up from November 12 to the end of December. You will see nearly 40 lakh weddings in India, so you are going to see 6 lakh crores of consumption coming on the back of that.
So, is that enough? It is not. We have lost six months and the EPS for Nifty has been downgraded by 2% to 3% for this financial year and the next, so that cut has come in already. But we are expecting consumption to pick up. So, a contrary bet would be buying staples right now, buying durables right now. Auto, I think two-wheelers are better. You are seeing rural recovery faster than the urban recovery and that is quite well correlated to autos with two wheelers.
So, I would say two wheelers rather than passenger vehicles. Commercials are in a different cycle. I think that will take more time.