With the risk trade on globally, foreign institutional investors (FIIs) were unusually aggressive in India last week, scooping up even high-beta equities (or shares with high volatility and risk).
So much so, they pumped in over a billion dollars (Rs5,301 crore, to be exact) in the first three days of February, after having committed Rs11,089.50 crore last month.
Experts said a combination of better macroeconomic data on the global and domestic fronts have improved FII sentiment towards emerging markets.
“From a situation of over-pessimism, FIIs have turned highly enthusiastic. Though nothing much seems to have changed on the ground over the last few months, there have been some positive noises from the government, and quarterly results, too, have been slightly better than expected. The liquidity has led to markets moving up sharply, which, in turn, is feeding more liquidity,” said Ambareesh Baliga, chief operating officer at Way2Wealth.
Buoyed by the heavy inflows since the start of calendar year, India has been among the best-performing markets in the world with the Nifty returning 25.27% in dollar terms and 15.17% in rupee terms.
Brazil’s Bovespa Index stands a close second with 24.71% dollar returns and 14.91% gain in terms of local currency.
Sandeep Singhal, co-head, institutional equities at Emkay Global Financial Services says the appreciation in the rupee has been one of the key factors aiding inflows.
“Also, some foreign investors who had booked losses in December to clean up their portfolios have reallocated funds to new portfolios and some have even increased their weightage for India,” he said.
Ridham Desai, Sheela Rathi, Utkarsh Khandelwal and Amruta Pabalkar, analysts at Morgan Stanley, believe the change in investors’ sector preference is an indicator of a new bull market.
“Cyclicals are back and the so-called defensives have underperformed. These are tell-tale signs of a new bull market,” they wrote on Friday.
In the current rally, the buying has been in high-beta sectors such as realty, metals and banks, which have risen 27-30% each even as defensives like FMCG have yielded just 2.12% returns.
With markets moving up briskly past the earlier expected resistance levels of 5150-5250, the domestic investors too have started buying.
“The sharp upmove has led to a left-out feeling among retail and high networth investors and so they are now venturing out to buy stocks,” said Mehraboon Jamshed Irani, principal and head - priority client group at Nirmal Bang.
Going by the trend, the Street feels the worst may be over, but says much more needs to happen to confirm a bull run.
“Once you are closer to the bottom of a market cycle, there’s a tendency to shift from defensives to cyclicals. But this rally has been brisk even though nothing has changed fundamentally, with corporate earnings still likely to see downward pressure. So some sort of consolidation is due,” said Singhal.
It’s a point the Morgan Stanley quartet concurs with.
“Not surprisingly, fundamentals remain fuzzy... The key difference between the 2003-08 period and now is that global growth is no longer supportive. To that extent, it needs an extra policy push to pull India’s growth rate back to trend. Corporates are suffering from poor profitability - inflation needs to remain moderate for that to improve. India needs time to adjust its macro to absorb risks from Europe and oil,” Desai, Rathi, Khandelwal and Pabalkar wrote.
Irani said valuations are reasonable but definitely not cheap.
“The problems in Europe persist and domestic reforms are yet to happen.And we may yet see this liquidity creating problems for India as it can keep commodity prices elevated. When that happens, it will be difficult for the Reserve Bank of India to cut rates.”
Comments