No Big Trigger for Bull Rally in the Near Term, Says Anil Ghelani of DSP Mutual Fund

The outcome of the US Presidential election does have some influence, but in my view it is not the primary driver of the Indian equity market. It will definitely have effect on the business dynamics and some sectors may see benefits, though it will take time to assess the exact impact. So other than the US elections outcome, a larger Event Risk lies in the ongoing geopolitical tensions, particularly in West Asia. An escalation here, especially if it leads to a significant rise in crude oil prices, could have a substantial impact on corporate margins across various sectors, eventually impacting the overall market performance.

It’s challenging to predict the exact impact until we know the specifics of any new tariffs. If we consider past examples, certain US tariffs have inadvertently benefited India. For instance, US tariffs on import of solar panels became a driver for reducing the cost of Chinese solar panels entering India, which helped advance our solar energy goals. But the effects of these tariffs can be complex at times. If the Western superpower imposes heavy anti-dumping duties on certain countries, those countries might try to redirect their exports to India, which could have mixed impacts. In some cases, this redirection could be advantageous for India.

It’s hard to make a concrete prediction at this stage. The US tariff policies are shaped by political factors and are hard to quantify analytically. At best, we can make informed guesses based on past patterns, but precise outcomes remain uncertain.

I don't expect any big trigger for a bull rally like we’ve seen in the recent past. Current valuations are high—not just for the Nifty 50 but also for mid- and small-cap stocks, which are trading at levels well above historical norms. We might be in a phase where the market needs time for earnings to catch up with these valuations, similar to the period during 2018 and 2021 when the Nifty 50 stayed flat even as earnings grew. The market has been moving faster than earnings growth, much like in 2020 when it anticipated an earnings drop. There might be a period of “catch-up” where earnings grow into these valuations before the next rally. As for the current environment, opportunities are still present in certain sectors or themes where valuations are more favorable or business cycles are turning in their favor. Rather than a broad rally, we may see select sectors perform well.

It’s more about structural flows than DII confidence. DIIs include institutions like EPFO, NPS, Life Insurance, and mutual funds, which regularly channel massive levels of flow into the market. EPFO alone contributed around Rs 53,000 crore last year, and such flows are likely to continue regardless of FII activity.

Also, not all FIIs follow the same strategies. Some may exit tactically, while others, bound by mandates, will keep investing in India. Currently, FIIs own about 17-18 per cent of India’s market cap or say about $800 billion. The recent October-2024 FII net selling of about $11 billion amounts to say 1.5 per cent of their total holdings—a significant but not drastic change.

While high valuations and earnings forecasts do suggest some caution, it’s also an opportunity for selective investment in undervalued areas. We may enter a period of moderate or sideways movement, which can create value in specific sectors rather than sparking a broad market rally.

Yes, some form of geographical diversification could surely be beneficial. One of the simple way is to invest via mutual fund houses who have global funds, or domestic funds where some portion is being invested globally. However, there is an industry level quota for mutual fund houses in India for making such global investments, and most have reached their limit currently.

However, there is an option to invest globally through the LRS (Liberalised Remittance Scheme), which is being used mainly by HNIs (high-net-worth individuals), UHNIs (ultra-high-net-worth individuals) and family offices. This could indeed be a viable solution for diversifying outside of India.

As I mentioned, they should consider a small allocation after consulting with their trusted financial advisor. However, the simple route for retail investors is limited at the moment. Investing abroad through mutual funds—which allows investors to access international exposure via a rupee-denominated product—has largely hit its limit with most fund houses.