HNIs Adopt 0 Participation in Near-Term Market Sentiment

The question on everyone’s mind Wednesday was whether the market rally was a sucker’s rally or a genuine recovery. Benchmark indices made a strong comeback, but the near-term outlook remains uncertain. This uncertainty affects how much investors are willing to pay for future earnings. High Net Worth Individuals (HNIs) have shifted to the sidelines, with many booking profits during every rally, especially those holding significant positions in PSU stocks. Local mutual funds continue to buy heavily, though fund managers have limited options but to invest the available funds.

Foreign Institutional Investors (FIIs) show caution, evident from the over $2 billion net selling in recent sessions. This caution might be justified as the BJP struggles to secure 240 seats, potentially interrupting fiscally and politically challenging reforms and leading to more populism, which could impact medium-term growth.

IIFL analysts G V Giri, Akshit Gangwal, and Vishal Mehta predict a shrinkage in Nifty’s price-to-earnings multiple. Currently, the index is 14% higher than the five-year pre-Covid average, while small and mid-cap indices are 55-60% richer. Before the election results, many market experts believed that share prices would continue to rise regardless of which party won. However, that optimism has cooled. While there is a bullish outlook for the next 2-3 years, the short term looks tricky, compounded by expensive valuations.

Reports indicate BJP’s allies, particularly the TDP, are negotiating hard for ministerial positions even before the new government is sworn in. Jefferies upgraded HUL stock from ‘hold’ to ‘buy’ and raised the target price from Rs 2,530 to Rs 2,950.

Bull Argument: Analysts see HUL as a good proxy for rural growth. With the unexpected election outcome, the government may adopt policies favoring consumption, benefiting HUL.

Bear Argument: Challenges like no pickup in rural growth, late monsoon, and margin issues could hinder HUL. Additionally, local competitors could affect its volume growth.