India’s valuation premium over peers rises, but why are DIIs selling?
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The recent rise in the equity markets has increased the premium that MSCI India enjoys over its peers, or the MSCI Asia ex-Japan Index, but the rise in the premium hasn’t been much over the past two weeks. That is seen in the accompanying Chart 1. However, as the chart shows, the premium has gone up quite a bit this year, suggesting that the improvement in the Indian economy has largely been priced in.
One conundrum, though, is the fact that while foreign institutional investors (FIIs) are flocking back to the Indian market, domestic institutional investors (DIIs) who were on a buying spree especially after demonetization in November last year, are now selling (Chart 2).
What could be the reason? The return of FIIs to the market is probably because of 1) the return to favour of emerging markets, thanks to a weaker dollar; 2) the momentum in dollar gains from the Indian equity markets; and 3) hopes of an improvement in corporate earnings. But why are DIIs selling?
Analysts say DIIs turning net sellers in March is a combination of factors and not just plain profit-booking, such as redemption pressures be it from mutual fund schemes or unit linked insurance plans or need of the fund managers to raise cash, which may be due to the market rising too fast too soon. Cash raised at higher levels may be used to reinvest in the market when some correction happens. So, this trend of DIIs selling into the market may not last for long, said Deepak Jasani, head (retail research) at HDFC Securities Ltd.
Sharing a similar view, Mayuresh Joshi, a fund manager at Angel Broking Pvt. Ltd, added that though sentiments and inflows remain strong, one key concern is that earnings are not catching up.
Nevertheless, it is likely that mutual funds seeing an influx of cash will soon have to deploy their monies in the market.