We may be in the mid of risk-averse market

We inherited a non-liberal market, which moved in a narrow-gauge based on improved domestic liquidity with a hope that earnings growth will improve in the domestic economy. From January-August, the market was very narrow and skewed towards super large and defensive stocks. But at present, this momentum is lost as liquidity from foreign institutional investors (FII) and domestic investors has reduced.

FIIs liquidity was slowly reduced during the year given a conservative view on emerging markets and attractiveness towards developed market's equity & debt. In the latter part, these outflows expanded as the premium valuation of India stretched, which was reinforced due to lack of earnings growth. The overseas investors are strained today due to increased global bond yield and trade war worries, as a result, they are funding out of non-dollar assets. Whereas, India's liquidity to equity has marginally reduced from retail and corporate investors. And the reasons for this include higher volatility during the year, base effect, better income from debt and deposit and slowdown in the economy. Recently, the quality of corporate bonds has reduced (IL&FS impact), leading to redemption in the debt funds by corporates.

FIIs have sold Rs 88,000 crore in the Indian market year-to-date (YTD), compared to an inflow of Rs 2,01,000 crore in CY17 (including equity and debt). Foreign investors are concerned about the fast pace of increase in interest rates and trade war worries which is likely to slow down the world economy. IMF has reduced world GDP growth by 20bps from 3.9% to 3.7% in CY18 and CY19 respectively. It is still a healthy number but the concern is over the forward effect of the higher cost of funds and the protectionist world. Foreign portfolio investments - asset under custody (FPI's AUC), which is FII's total exposure in India including equity and debt, has reduced by 10% from Rs 35 lakh crore to Rs 30 lakh crore. It is inversely proportional to the global bond yield, which has increased by 70bps to 3.2% during this year. The US Fed is expected to increase the interest rate by two-three times in the next one year.

Total investment in equity by domestic investors (MFs and other institutions), is at Rs 96,000 crore YTD compared to Rs 69,000 crore same time last year. This is largely due to higher participation by the mutual fund in the equity market which had brought an equal amount of about Rs 88,000 crore in 9MCY17 and 9MCY18. Having said that, total inflow in MF equity from retail and corporate during the same time has reduced to Rs 1,29,000 crore compared to Rs 1,76,000 crore in 9MCY17. While the trend in debt inflow has turned negative from Rs 1,45,000 to –Rs 25,000.

The ongoing turmoil led by financial crunch in the domestic economy, global risk-off and worries over upcoming elections is likely to maintain its burden in the equity market. At the same time, it is possible that a good portion of the above-mentioned risk factors have been digested by the market and the upcoming impacts will depend on developments like stability in global bond yield and trade war.

India's valuation is at a premium of 50-60% compared to other emerging markets, India had an average premium of 37% in the last 10 years. MSCI-India is currently valued at a P/E of 16.2x compared to an average of 17x. Valuation is looking lower because it is based on an earnings growth forecast of 20% in the next two years. While earnings have a risk for being downgraded in the future since actual Nifty50-index earnings growth is less than 10% in HIFY19, as per the actual results of Q1FY19 and preview for Q2FY19.

The writer is head of research at Geojit Financial Services