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In this edition let us discuss the following,

* FPI Selling continues

* Q2 Result Season

* Key factors around market sentiment

FPI selling continues:

As expected, higher bond yields, which take money away from equities, and high oil prices, which impact Indian macroeconomic conditions negatively, have contributed to FPIs taking money away from India.

The other reason, that of AI growth stocks which are available in other markets, seem to have at least paused for the time being. We had noted last month that the AI theme seem to be less certain. Chinese competition is rising in spaces like memory chips adding competitive pressure on South Korean memory chip manufacturers. Also, while the use of AI is increasing globally, the pace of adoption may be slower than previously expected. The cost of AI is high. Many companies have put caps on usage of AI by employees. Lower usage and higher cost of capital and emerging Chinese competition could affect valuations across the AI stack, at least for the time being.

Indian currency has strengthened recently, supported by USD inflows on FCNR B deposits and Central bank defense of the currency. INR has strengthened from close to Rs97 to a dollar to below 95. Forex reserves have dropped though part of the reason could be RBI delivering on the USD sold short earlier. RBI also allowed oil importing companies like refineries to buy dollars directly from itself, reducing the volatility in the market. Stable currency could help.

The net result is that in spite of oil being close to USD110/bbl and high bond yields, the net selling by FPIs could be in the same USD3-4bn range, that we have been witnessing.

Result season is delivering strong numbers. There has been some positive news as well

The result season has been strong with two large spaces of IT and banks delivering strong numbers. Broad market results have also been strong.

Software results have been strong. Moreover, there has been a strong hiring reported by software companies. This may ease fears of second order impact of AI on Indian economy.

India is seen as an anti-AI trade. With AI trade pausing globally for several reasons, India is seeing relatively better performance. However, this also means that companies seen as AI enablers in the country are also undergoing a correction.

What can cause the direction of the market to change globally and locally?

The recent sharp fall in the markets is partly attributable to higher bond yields globally. Higher bond yields are often associated with higher inflation. Higher oil prices are a common cause of inflation globally and in India while AI spends are also playing a role in some geographies like the US.

Bond yields can fall if inflationary expectations fall and the biggest contributor could be fall in oil prices. Opening of Strait of Hormuz may be the way to accomplish this. We do believe that AI spending is likely to remain strong with no clear indication of a slowdown in this space.

US probably holds significant influence bring about normalcy in crude prices through lowering of hostilities in various parts of the world. While US as a whole does not get impacted by high oil, it being a net surplus country, the population gets impacted on higher pump prices and it can impact voter sentiment. With the US mid-terms approaching, the time is running out fast. If any resolution is expected, it would have to be very soon, else the stress could continue.

Lower crude prices can change the outlook on India sharply, as they could help reduce the trade deficit. Now that AI trade is factored into market prices, lower oil prices could be an important factor in improving India's relative market outlook.

It does seem like India has a potential to deliver better outcomes over the next year relative to other global economies on

* Move to other spaces as AI investment and market dynamics evolve

* Potentially lower crude prices on Hormuz traffic normalizing

* Potential for growth in India relative to the global economy, supported by relatively cheaper cost of capital

* Potential resolution of India US Trade Deal

* Relatively Lower valuations compared with respect to other Emerging Markets and Developing Markets after underperforming for two years

* And lastly, within India, we are witnessing several new spaces emerging, with the potential for sustained growth, which makes it a period of alpha.

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