Daily Voice: Another 2,000-point fall in Nifty Smallcap possible, but don't anticipate major pain in FMCG from here, says this fund manager

As a principle, we refrain from making direct predictions about the future of the stock market. However, as investors, we can still prepare for what lies ahead. While history doesn't repeat itself exactly, it often rhymes. Here's a quick look at some historical market corrections in the broad market index, Nifty50:

Currently, the market is seeing a 14% drawdown, and there is certainly the possibility of further downside from here. We cannot rule out the potential for additional corrections.

Do you think the return of FIIs to India is unlikely, at least until the June quarter?

In the short term, market movements are often driven by factors like money supply, economic policies, and interest rate changes. With rising bond yields in the United States and the depreciation of the dollar, it appears that foreign institutional investors (FIIs) may continue to be net sellers for some time. However, over the past 5-7 years, mutual funds and domestic investors have played a crucial role in cushioning the market's downturns. Even if FIIs do not return in the short term, domestic buyers have the capacity to absorb market shocks and help support the recovery from current levels.

Is the IT sector still looking expensive, even after the sharp correction from its record high?

The IT sector does not look expensive at current valuations but we do not see very aggressive growth for next few years in this sector. This sector is heavily driven by export of services and with the US having a tough job in front of them, it will be an uphill climb from here.

Do you foresee further correction in the FMCG sector, even after it has already lost 22% from its record high?

The FMCG sector is typically viewed as a safe haven for investors, known for its strong earnings visibility and steady growth trajectory. However, even low-volatility businesses like FMCG have faced significant challenges recently. After the 22% correction from its record high, we do not anticipate any major pain in the sector going forward. The fundamentals remain strong, and while the sector may continue to face short-term challenges, we believe its long-term growth story remains intact.

Is there still a possibility of a further 2,000-point fall in the Nifty Smallcap index, considering the earnings risk?

Earnings for Q3 have indeed taken a hit, especially in the small and mid-cap space. As of now, the Nifty Smallcap 250 Index is down by 21%. Another 2,000-point fall (approximately -13.5%) is a definite possibility, given the current risks to earnings, low liquidity in small-cap stocks, and the general tendency for bear markets to end in panic. External factors such as geopolitical tensions and the ongoing tariff wars add further uncertainty. While short-term pain may persist, our long-term outlook for India’s growth story remains positive.

Are the US markets looking expensive now?

When compared to Indian markets, the US markets have not yet experienced a significant correction. Historically, whenever bond yields rise, US markets tend to face significant pullbacks, but we haven’t seen that kind of correction so far. The next 5 years will be crucial for the US markets. With rising debt burdens and the challenge of managing both growth and debt, policymakers will face a tough task. Considering these factors, US markets appear expensive, especially given the challenging long-term growth outlook.

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