Home / Markets / Stock Markets /  Domestic investors have held up the market so far, but for how long?

NEW DELHI : Domestic investors may continue to remain bullish on equities in the foreseeable future even as interest rates inch up across the globe, analysts said.

The sustained buying by domestic institutional investors (DIIs) has continued supporting the markets on the downside amid regular selling of equities by foreign portfolio investors (FPIs), which is putting pressure on the markets. FPIs sold equities of around 2.11trillion while DIIs have bought equities of around 2 trillion during 2022 till 22 June.

FPI outflows are likely to continue for the most part of 2022, led by the expected rate hikes in developed countries and also higher bond yields, but investors remain watchful on the sustenance of DII inflows. There are concerns that the volatility in the markets that is impacting returns can push away retail investors to fixed income products such as fixed deposits offered by bank as interest rates rise. This would lead to a slowdown in equity investments in the coming months.

Rising interest rate is negative for equities as the discount rate for cash flows increases, lowering the valuation for stocks and markets, said Shrikant Chouhan, head of equity research (retail), Kotak Securities Ltd.

 Experts are cautious but are also optimistic that the flows and equity investments may continue.

“Markets have been volatile from October 2021 onwards. However, we have not seen a slowdown in fund flows yet and this gives us reason to believe that domestic flows should sustain in the medium term" said Tejas Gutka, fund manager, Tata Mutual Fund.

The final test for these flows will be in the near term as 1-year returns have turned flat to negative and, historically, these are times when fund flows have slowed down, Gutka said. However, a long-term investor mindset backed by sound advice from the distribution community has held up the flows despite the volatility witnessed so far. This may continue to be the case henceforth as well, he said.

Even Kotak’s Chouhan feels the same and says that domestic investors who are looking for value buys will start accumulating such reasonably valued stocks and also valuations in certain pockets have improved meaningfully.

Fund managers are of the view that while the allocation towards debt funds can increase at the cost of equity funds. However, beyond the near-term volatility, as the equity rally resumes, it would continue to attract flows.

Investment of about 1,800-2,000 crore in certain exchange-traded funds by the Employees’ Provident Fund Organisation is another reason for the confidence of analysts.

 Analysts also feel the strong equitization of the Indian financial markets that has happened in the last few years and the increasing participation of younger people in the workforce, are some of the factors that are helping.

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