Mumbai: As foreign institutional investors (FIIs) flee towards dollar assets, domestic mutual funds and insurance companies are picking up the slack. Domestic institutional investors (DIIs) bought Rs18,277 crore worth of Indian shares in November, the highest in eight years.
Fund managers said that retail investors continued to put money in systematic investment plans (SIPs). Institutions also deployed accumulated cash to buy stocks when prices fell in the aftermath of the government’s demonetization decision and Donald Trump’s surprise win in the US election.
“The market had already corrected from its earlier peaks. Demonetization is only a short-term blip for the market, and the long-term outlook remains intact,” said Ritesh Jain, chief investment officer of Tata Asset Management Co. Ltd, who oversees assets worth Rs40,238 crore.
The domestic institution behaviour is in stark contrast to foreign investors who sold $2.6 billion of stocks in November, the highest outflows since January 2008, data from the Securities and Exchange Board of India show.
Rising US yields and a stronger dollar—on the back of expectations of a US Fed rate hike in December and likely expansionary fiscal policy from Trump—were the key factors triggering outflows from emerging markets.
In India, where the currency withdrawal exercise dented the consumption story, foreign investor risk appetite was even lower. Outflows in November were the second-highest in Asia as hopes that consumption would boom on the back of a good monsoon after two years of drought and a pay bonanza for government staff were washed away with the demonetization move.
Benchmark equity indices Sensex and Nifty fell 4.57% and 4.65%, respectively, in November, their worst show since January.
“While DIIs are gradually increasing their footprint, as we see increasing amount of household investments coming into their funds, it will be a long time until such inflows become big enough to counter FIIs’ outflows in the market,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.
The double whammy of Trump’s win and demonetization prompted brokerages to pare earnings estimates, particularly for consumption industries. Deutsche Bank, for instance, cut earnings estimates and target prices by up to 24% for some firms.
Still, with many believing that the currency withdrawal exercise will have only a short-term impact, buying continues.
“The domestic inflows are driven by fall in interest rates, which makes equities attractive from earnings and valuation perspective,” said Nilesh Shah, managing director of Kotak Mahindra Asset Management Co., which manages Rs74,152 crore of assets.
“Interest in consumption-related sectors has taken a hit, but will be a great opportunity to buy in correction,” Shah added.
Mutual funds were responsible for two-thirds of the inflows seen in November. They invested Rs13,159.20 crore, again a record high. Dealers said Life Insurance Corp. of India, the state-run insurer, also bought shares at a gradual pace. An email sent to LIC remained unanswered.
“People are incrementally putting in more money in funds, preferring the SIP route, as other investment avenues are gradually becoming less attractive,” said Gopal Agrawal, chief investment officer, Mirae Asset Global Investments (India) Pvt. Ltd, which manages Rs5,701 crore of assets.
“We are also investing in the market despite the haze, as we find value in selective stocks. It is a bottom-up approach,” he added.