In recent years, the Indian equity markets have demonstrated remarkable resilience amid global economic uncertainties. Dhruv Goyal, Founder and CEO of FourLion Capital, has been vocal about the evolving landscape of these markets, particularly highlighting how the volatility profile has significantly decreased. This blog post delves into Dhruv Goyal insights on market dynamics, the role of domestic capital, and the implications for investors.

Understanding Market Volatility

Volatility in financial markets refers to the level of variation in trading prices over time. Generally, high volatility reflects uncertainty and risk, while lower volatility is stable and predictable. For investors, knowing the volatility profile is very important because it affects investment strategies and risk management.

Indian markets have been known to fluctuate throughout history due to several factors and various influences, which include FPI flows, global economic conditions, and domestic economic performance. However, the recent trends reflect a shift towards reduced volatility, mainly because of strong domestic capital inflows.

Domestic Capital at Play

According to Dhruv Goyal, one of the major reasons why the market volatility is coming down is because of the significant surge in the domestic capital. When the foreign investors withdrew their funds from Indian markets during events of global uncertainty; the DIIs and retail investors have now been replacing them.

According to Goyal, the domestic equity AUM has increased phenomenally over the last decade. At the end of August 2024, it touched ₹30 trillion or $357 billion, compared with ₹2 trillion in 2014. This more stable base of investors cannot be as easily shocked compared with the foreign base that tends to get impacted more by the global playing field of markets and currency drifts.

Shifts in Market Ownership Dynamics

Another critical element highlighted by Dhruv Goyal is the changing landscape of market ownership. With DIIs and retail investors controlling around 53% of free float in Indian equities, there has been a stability in the market environment. As for FPI ownership, it has dropped to 12 years’ low 18.8%.

This new composition of market participants is beneficial in reducing overall volatility. According to Goyal, DIIs are more resilient during downturns as they will not react impulsively to short-term fluctuations in the market or the currency. Thus, this stability has come to nourish a conducive atmosphere for sustained growth.

Current Market Valuations

While Dhruv Goyal talks about being optimistic regarding the state of the Indian markets, he does caution about valuations—especially small- and mid-cap stocks. The NIFTY MidSmallCap 400 Index is currently trading at a price-to-earnings ratio of around 38.6x, way above historical averages. The large-cap NIFTY 50, on the other hand, are trading at forward-looking earnings multiple of about 21x.

Dhruv Goyal warns that elevated valuations in the smaller stocks pose a risk if multiple expansions rather than actual earnings growth drive the move. He is of the opinion that even as large-cap valuations seem warranted due to corporate deleveraging and healthy capital expenditure cycles, investors need to keep a close eye on potential corrections in the mid- and small-cap space.

Drivers of Future Volatility

Although Indian markets are stable at present, Dhruv Goyal points out several factors that may introduce volatility in the future:

• Earnings Growth: Slow earnings growth may result in a revision of market expectations. If companies fail to deliver projected earnings due to headwinds from the economy or operational issues, it may lead to sell-offs.
• Political Stability: State elections are due soon, and this may bring uncertainty into the political arena. Any perceived instability may affect investor sentiment and increase volatility.
• Global Economic Conditions: With the interdependence of international markets, a shock to the global economy can reflect in the Indian equities market. Consider the situation where the threat of a global recession prompts foreign investors to withdraw capital from emerging markets such as India.
• Equity Supply: The rise in the supply of equities from initial public offerings (IPOs) and secondary sales may also be a factor affecting market dynamics. With mutual funds holding record cash reserves, a significant increase in supply without adequate demand would see price corrections.

Conclusion

Dhruv Goyal’s insights into the Indian equity markets reflect a period of notable resilience characterized by reduced volatility profiles driven by strong domestic capital inflows and changing ownership dynamics. While current market conditions appear favorable for sustained growth, investors must remain aware of potential risks associated with high valuations and external economic factors.

In 2025 and beyond, balancing the view of opportunities and risks going forward will be very pertinent in doing that successfully. Investors will have more potential to create further offsets of advantages of the Indian market while countering the associated possible downsides by being better informed and responsive to change.

In sum, while the journey ahead is full of challenges, Dhruv Goyal’s analysis presents a roadmap for analyzing how domestic capital will play a lead role in shaping the future direction in Indian markets amidst global uncertainties.