FIIs pull out most, DIIs invest maximum in August since November
Mumbai: Net outflows from foreign institutional investors in August added up to $1.7 billion, the highest since November, as risk was off the table due to tensions between the US and North Korea, and as high valuations coupled with delayed earnings recovery also deterred foreign investors from adding more to their already India-overweight portfolio.
“The headwinds the market faced were two-fold—one was the geopolitical tensions in the Korean peninsula, which led to risk aversion. On the domestic front, the tepid earnings growth also disappointed investors,” said Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd
“Since many were heavily overweight on India, they trimmed positions and monetized some profits. With latest developments regarding North Koreas nuclear test, the developments in the region will continue to be an overhang on the global risk appetite,” said Bodke.
That said, the domestic earnings scenario from hereon looks promising, says CLSA.
In a report dated 29 August, CLSA analysts argued that Nifty earnings growth could rise to double digits from the quarter ending September, after stalling around a 2% compounded annual growth rate (CAGR) for the past five years.
“The macro environment seems favourable as the disruptive forces of demonetisation, GST (Goods & Services Tax Act) and NPL (non-performing loans) recognition fade, creating a low base from which to launch healthy year-on-year earnings trends,” CLSA analysts said in the note.
“Meanwhile, strong, sustainable domestic equity inflows should continue to support rich valuations,” they added.
However, domestic institutional investors (DIIs) pumped in a net of Rs15,695.51 crore in Indian shares in August, the strongest such inflow since November, as they opted for equities through mutual funds, after lower interest rates prompted them to look at other avenues for investing.
According to Vidya Bala, head of mutual fund research at Fundsindia.com, post demonetisation, the flows have become more evident, though traction was there before the event as well.
“People are coming to equities through the mutual fund route, as other asset classes have ceased to be as attractive as before,” said Bala.
“The offtake in real estate has slowed down, lower interest rates and higher liquidity with banks have in turn brought down bank fixed deposit rates. Gold also has not had a steady run,” said Bala, adding that there has been a surge in new customers investing in mutual funds.
“Apart from pure equity schemes, balanced funds have also attracted good amount of funds, from new investors who have moderate risk appetite,” said Bala.
According to distributors and fund managers, investments through systematic investment plans (SIPs) are picking up.
SIPs allow investors to regularly invest small amounts instead of making lump sum investments at various points of time. Such investments are usually made on a monthly or quarterly basis.
“For us, the SIP book has grown month on month by around 5%, and the major chunk of this money is into equity schemes,” said Bala.
In fact, DIIs managed to keep the market up, even as FIIs were not around.
The 30-share Sensex had touched a record high of 32,686.48 points on 2 August, and is down 2.43% since then.
“It is a combination of sustained strong inflows in domestic mutual funds. The correction in the first fortnight of August enabled fund managers to pick up certain stocks at cheaper prices,” said Gopal Agrawal, chief investment officer (equities) at Tata Asset Management.
“Lower interest rates, has also been a positive trigger,” he added.
Agrawal does not see these strong inflows abating, even as valuations look stretched.
“Though valuations are on the higher side, we are seeing relative global stability as compared to a year before. For example, the possibility of hard landing of China is no longer around, the commodity prices have recovered substantially. The geopolitical risks are around, but they are not as big as other risks we had a year before,” he said.