Indian Equity Markets No Longer At Mercy Of Foreign Flows

Equities have given most returns compared to gold and real estate in last 3 years.
An elevator travels next to electronic boards displaying stock figures at the National Stock Exchange of India Ltd. (NSE) building in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
An elevator travels next to electronic boards displaying stock figures at the National Stock Exchange of India Ltd. (NSE) building in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Brokerages have reaffirmed their faith in Indian equities as retail investors have helped counter foreign fund outflows triggered by note ban in India and Donald Trump’s win in U.S. presidential elections.

Retail investors pumped nearly Rs 34,000 crore into equity-based mutual funds in November-December. The inflows eventually translated into domestic institutions -- mutual funds and insurance companies -- buying equities worth over Rs 27,000 crore since November 8, helping offset most of the outflows by foreign portfolio investors.

Tracking steady domestic flows into equities, the benchmark S&P BSE Sensex has gained nearly 6 percent since November 21, 2016, when it hit a six-month low on worries over the impact of demonetisation and Trump’s protectionist policies.

While analysts attribute lack of better investment opportunities as a reason for rising domestic equity flows, improved earnings visibility, easing regulatory environment and higher returns are also driving optimism.

The opportunities in other asset classes are less so money has started finding its way into a structured product like equity.
Deven Choksey, Managing Director, KR Choksey Investment Managers

Unlike Sensex, which has gained 31 percent, gold and real estate have lagged in the last three years.

Market experts anticipate the gap to widen as the government cracks down on illicit money finding its way into real estate and gold.

Given the high-risk, high-return approach and expectations of a better 2017 in terms of earnings visibility and policy boost, there is an increased amount of attraction to equities.
Gaurang Shah, Vice-President, Geojit BNP Paribas

Mutual fund assets have clocked the highest growth in seven years, reflecting increased participation by retail investors.

Fund houses said the average monthly retail investments, which typically come through systematic investment plans (SIPs), shot up to Rs 4,000 crore last year as compared to around Rs 1,800-2,000 crore in 2015.

I think domestic investors are finding that there is no other source of earnings potential in this market than equities... Therefore, a lot of investors are shifting to equities either through PMS (portfolio management services) or mutual funds.
KR Bharat, Managing Director, Advent Advisors

Analysts see more household savings coming into equities, coupled with hopes of improved tax savings in the Union Budget on February 1.

“I don’t see any negatives impacting (retail) flows. On the contrary, more money coming into the system means more amount of investable surplus available with the people. So if the government ends up giving tax rebate to individuals, then the number will go only higher,” said Choksey of KR Choksey Investment Managers.

While overseas investors were net sellers of domestic stocks, they have remained net buyers in the derivatives segment, suggesting some momentum in the near future.

According to the National Securities Depository Ltd.’s website, foreign investors have bought index futures worth about Rs 12,725 crore since November 8.

“FIIs with long-term view have held off their investments. I think the signal is they are not buying into India at this point in time and are waiting for more clarity on policy front," said Ajay Srivastava, Managing Director, Dimensions Consulting.

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