Mumbai: Shareholdings of domestic institutions in listed companies rose to the highest in at least 25 quarters in the three months ended December, on the back of relentless buying by mutual funds and insurance firms.

According to BSE data, in the December quarter, domestic institutions held an 11.36% stake in the BSE 500 index, which accounts for at least 89.01% of India’s market capitalization. Of these 500 firms only the 440 for which data is available for 25 quarters were considered for the review. The share of domestic institutional investors (DIIs) in these same companies were at 10.92% in the September quarter and 10.21% in the December 2016 quarter.

Analysts said the financialization of savings after demonetisation led to a shift of flows from physical to financial assets and the trend is expected to continue.

“This, coupled with a positive sentiment for global as well as Indian equities, has led to a substantial increase in allocation to Indian equity mutual funds, which is manifested in the large SIP (systematic investment plan) books that many mutual funds are currently running. This financialization of savings appears to be more structural in nature, and therefore likely to continue in the near term. The strong flows could, however, get tested in case of a sharp correction in equity markets," said Unmesh Kulkarni, managing director and senior adviser, markets and advisory solutions, at Julius Baer Wealth Advisors (India) Pvt. Ltd. 

Consistent buying by domestic investors in Indian shares kept liquidity intact, driving equities to scale new records. At the end of the December quarter, DIIs bought a net Rs27,477 crore worth of local stocks, the most in the year after the September quarter. In 2017, they bought a record Rs90,834.80 crore worth of Indian equities. During the same quarter, benchmark indices Sensex and Nifty climbed 8-9%, while the MSCI World index was up 5%, the MSCI Emerging Markets index rose 7.09% and the MSCI India index gained 9.09%.

However, concerns on steep valuations and continuous earnings downgrades led to foreign institutional investors (FIIs) reducing their exposure in Indian companies in the October-December period. FIIs’ stake in the 440 companies reviewed fell to a four-quarter low of 20.4%, as against 20.29% a year earlier. FII stake in these firms were at 20.66% in the September quarter.

Abhijeet Dey, senior fund manager, BNP Paribas Asset Management Co. said, “FIIs were not comfortable due to expensive valuations in both large and midcaps while earnings growth had taken a back seat. US markets were also doing well; so, a large portion of their investment was allocated in their own regions. However, they are back in India again this year though nothing much has changed fundamentally or anything has got cheap. Maybe FIIs are looking at value buying which is why IT stocks rose while PSU banks’ recap plan has also been liked by them." 

In the December quarter, FIIs invested $2.51 billion in Indian shares after selling equities worth $3 billion in the previous quarter. However, in the whole year 2017, they bought local shares worth $8.01 billion and so far this year, they have invested $1.76 billion in Indian equites.

According to Kulkarni, some amount of FII activity may have shifted from the secondary markets to the primary markets as 2017 was a blockbuster year for Indian primary markets. He also added that FIIs may have preferred higher allocation to a few other emerging markets that have so far demonstrated better earnings growth, but feels that the earnings cycle in India has bottomed out and will show an upward trajectory from hereon, which should revive FII interest in the Indian secondary markets.

However, though early trends in December quarter corporate earnings indicate a revival in business growth, there has been no change in the earnings estimates which continue to be on a slippery slope. For fiscal 2018, the earnings estimate for Sensex firms has been cut by 10.61% since April. For fiscal 2019, it is down 4.2%. At current levels, Indian markets are more expensive than peers, with the Sensex trading at over 19 times its one-year forward earnings.

Going forward, earnings growth is expected to depend on the Union budget as the government is in election mode, added Dey. “Sectors which work on rural, roads, defence and railways are likely to benefit from it," he said.

Eight states—Karnataka, Chhattisgarh, Madhya Pradesh, Rajasthan, Meghalaya, Nagaland, Tripura and Mizoram will hold assembly elections in 2018 as the ruling Bharatiya Janata Party gears up for Lok Sabha elections in 2019.