FII selling nearing saturation point; valuations shifting to comfort zone: Rahul Veera

"We believe from here on there would not be major gains, all the profit booking by FII that we have seen in the past six months, the intensity will cool off from here on," says Rahul Veera, Nippon India AIF.

So many moving parts within the globe. Help us analyse where the entire emerging market versus DM trade is actually as of now.
Rahul Veera: If you see last for the past one week, your dollar index is down from 110 to 103 levels now. At that point of time, also the US yields, currently to 4.5%. We see that it is moving closer to 4.2%. So, some kind of EM trade was possible, but at the same time, not all EM markets are going in a similar direction.

Again, a lot of them are moving in a sporadic way. For example, if we see Jakarta index today, it is almost 4.5% down today within the emerging market itself. So, very selective markets are up. There was a broader EM direction, which was positive, but only some markets are doing relatively better.

What is the importance of dollar index? I know everybody talks about it, but the money could go to Europe, money could go to China, money could go to Japan. I mean, yesterday's sell figure was 4,000 crores. So, dollar index is down, yet FIIs are selling.
Rahul Veera: If you see the weight of dollar index itself, 55% is indirectly the euro, then the Swedish Krona, and then the Yen, like all three of them have different weights within the dollar index.

So, dollar index moving down, it is broader EM trade, the risk off trade that is playing out, that is the way to look at it.

The risk off and risk on is more or less directional with the DXY, that is why that EM versus DM, that is the trade call that happens with DXY, that is the way we look at it.

So, in the near term, what could be the trigger for us? Could it be monsoon? Could it be earnings? Could it be oil? Could it be tariff? What are the next two-three triggers for the market?
Rahul Veera: On the conservative side, if we see the FIIs selling, almost 16% of the total index is held by FII today. The lowest that they have gone off till date is 13% back in 2004.

So, from 16% to 13%, that is 3% of our total market cap of $4 trillion, so almost $120 billion selling is still a potential, like the worst case scenario that we can talk about.

But we have seen that at every $10 billion selling of FII, in October we saw almost billion that comes through, the market goes off down by 10%.

So, every 10 billion dollar from here on selling moves the market down by 10%. Now over the past six months we are already down smallcap, midcap are more than 20% down, the broader market is almost 14% to 15% down.

From here on the valuations from froth zone have come down to comfortable zone. From here on with 87-88 rupees your dollar index plus given the earnings visibility or the cuts possibility, we believe the intensity of FII selling will slow down from here on.

The intensity will slow down, that is the way to look at it. We believe from here on there would not be major gains, all the profit booking by FII that we have seen in the past six months, the intensity will cool off from here on.
See currently we are close to 15 lakh crore of profitability for the NSE 500 companies.

So, earning visibility for 12% to 15% for the broader market is still there. So, the visibility will be one key trigger, monsoon will be another kicker out there. Also, we are seeing some of the catalyst beyond what we have seen on the budget side or even directly or indirectly the 8th pay commission which is going to play out over the next 6 to 12 months.
There are multiple factors that are going to play out. The whole question is when will the FII selling stop. We believe that is going to be very soon. Intensity will slow down from here on, so that is the broad call that we are taking as of now.

The one call that everyone is wondering about is whether to go all in into India right now or do you think the year ahead is going to give us many opportunities to do that?
Rahul Veera: See, we will have to be very selective from here on. From forth zone we have come down to a comfortable zone in terms of valuations. But are we in a deep value zone?

The answer is no. We are not completely in a deep value zone. Selective pockets are very clearly visible where valuations are much more comfortable.

So, we will have to be pure bottom up, look at the balance sheets over the next two to three years how will these things shape up, how the earnings growth or the profitability of respective companies, so what we saw the momentum for the past three years we believe that will not be back. It will be very sporadic. From here on we will have to be very-very selective in selecting the stocks for the respective portfolios or the strategies.

Like you said you have to be very selective. We are not exactly in the deep value zone when you talk about the market despite we have seen a sizable correction. So, I wanted to understand where in the markets are you finding value right now and which sector do you think looks attractive apart from banks?
Rahul Veera: So, beyond financials we believe healthcare is going to do really well. Again, if you see the tail, a lot of these companies in the tail of the not the larger pharma names but the bottom ones on the tail side are doing selectively very well.

Some of the molecules that have been approved by the respective companies are actually going to bring very strong capability and the earnings visibility for the next three to five years which these companies will be able to showcase.
So, we are selectively positive on the pharma names. Again, on the building material side some of the names that we are seeing the trigger overall playing out over the next two years is very strong.

Also cement, we believe the consolidation in the next six months will play out. Also, the price growth that we are expecting in the cement sector will play out. The possibility of increasing royalties or at the mining level by state governments is happening but that hangover will be there but cement broader should do well over the next two years.

Do you see merit in going back to government dominated stocks as in where capex was down and they could come back?
Rahul Veera: It is going to be very challenging. If you see the budget, 11 lakh crore of total capital outlay that was downgraded to 10.8 lakh crore for the last year.

This year again they revised it to 11 lakh crore, but within that if you see the sub-segments of the budget outlays, only power segment was the one which has shown higher growth 14% to 15% of capital outlay in the budget.

The other ones like roads, railways, defence were almost flattish on a year-on-year basis. So, you will have to be very selective.

So, we believe on the capital play or the capex play, power segment is going to do well. Within that defence, roads, railways you have to be very-very selective here.

You did speak about the fact that the earnings growth will be a key catalyst for the markets going around from here on. We have not seen great earnings for the last two to three quarters and if you have to actually look at even Q4 the signals or the indications are not that bright as well. What is your take coming in on the earnings growth especially when we now step into the next FY and what should one pencil in when you talk about earnings?
Rahul Veera: See, incrementally QoQ basis or Nifty level we were 5% earnings growth for the market, then we moved in Q3, we were closer to 8% and Q4 possibly we will move to 10% to 11%. So, broadly we are moving touching the double digits now.

Now what has happened incrementally a very interesting point here in Q4 itself because of the tariffs, a lot of these export oriented companies have mentioned that they are doing very well because there is a bunch up of the exports towards US. So, a lot of companies in the US because of the tariff war they are trying to avoid any tariff related disruption and have been loading up.

So, Q4 for the export oriented sectors will be relatively better but of course in Q1 again they will cool off. Now, on a consistent basis going forward for FY26 11% to 15%, 11% for the largecaps for the Nifty index and 15% for the broader index earnings is what is easily achievable.

What is happening in the small and the midcap space according to you? Do you see that this space has topped out for many years now? I mean, there are exceptions in any sector but in general do you think this clan which is known as the small and midcap clan, has that space, that pocket has it peaked out for two-three years now?
Rahul Veera: See that momentum, I will tell you a couple of things in my view which have played out. If you see five years back the number of Demat accounts, from 3 crores moved to 17-18 crores.

So, all the money that had to be flushed in for one particular point of time in the past three years was pushed into in the markets for whatever different reasons has happened, so that one time of re-rating for smallcaps and midcaps that momentum that it created for across the market has played out very well.

Now going forward again you will have to be selective from here on, balance sheets, your cash flows for the next two to three years, your earnings visibility and the entry point of valuations, all these factors will play out from here on.

So, smallcap and midcap will do well if you are a good bottom-up stock picker that will do well, but for momentum or the whole breadth of the basket that will play out the answer is no. You will have to be very selective from here on.