Sentiment has a peculiar way of changing direction under the impact of flows. The weak sentiment we saw after the tariff episode seemed to be here to stay for a while. The market also did not seem to be in any hurry to buy. We saw fund managers being celebrated for the cash calls they had taken earlier. It appeared like being invested was not exactly the right thing to do.
And, in just a few weeks, everything seems to have turned hunky dory. The market has seen a sudden reversal in the direction of FII flows. After the dollar index broke 100 on the way down, inflows began.
Clearly the money is going into the index pivotals. Financials are getting the lion’s share of the flows and the bank nifty has been leading the market. Markets driven heavily by flows can only be fickle.
While we saw extended weakness during prolonged phases of outflows, we could well see extended strength on the back of sustained inflows. Flows clearly hold the key to this market. They will decide the market direction and the sustainability of valuations.
Domestic flows seem to have positioned themselves wrongly in this market. Most monies were going to small-caps and midcaps even during the tariff imbroglio. This could well lead to a divergence in the performance of the headline indices and portfolios of domestic investors. Domestic investors may need to adapt to the evolving market scenario and position themselves appropriately. It has been long since domestic investors anticipated a top down trade and participated effectively in it. This trade seems to be a test of the domestic investor’s ability to adapt and invest appropriately to capture a flow driven top down trade in our markets.