St foxed as domestic institutional investors (DIIs) sell incessantly

The pace at which domestic investors have been selling equities has baffled brokerages, which now believe they are unlikely to return to equity markets in a significant way in the next 2-3 quarters.

With just two sessions to go, this fiscal is set to register the highest ever selling in a year by domestic institutional investors (DIIs). Insurance companies, mutual funds, banks and domestic financial institutions together have net sold equities worth Rs68,723 crore so far, up from Rs56,923 crore last fiscal.

It’s an “exodus”, foreign brokerage Citi said in its latest strategy note.

Indeed, domestic investors don’t seem to be interested in equities despite the markets moving up 21% over the last 15 months. “There are reasons investors don’t care for equities – weak performance with negative 8% returns from 2007 peak for Sensex and negative 38% returns for midcaps as compared to deposits (+54%), real estate (+25-150%) and gold (+179%). Also, with household financial savings falling (-11% for FY12), there’s less going around. Domestic investors haven’t been wrong, so far,” Citi analysts Aditya Narain and Jitender Tokas said in a note on Monday.

Morgan Stanley India believes investors are concerned about bad incoming data, consumer price inflation and political uncertainty.

“The Indian equity market has hit a wall, all over again – especially the Small Caps Index, which is down 22% year to date. What exactly is troubling the market? Our conversations with investors and an analysis of market behaviour reveal that market participants appear unwilling to be forward-looking on economic data,” Morgan Stanley analysts Ridham Desai, Sheela Rathi and Utkarsh Khandelwal said in a note on Monday.

Interestingly, the pace of selling has picked up considerably in the last six months with DIIs buying only in 11 sessions since the start of October.

The acceleration in outflows has other reasons, believe Citigroup analysts. “In case of MFs, strong flows in 2007-08 are being unwound, as NAVs reach break-evens, but there shouldn’t be much selling left. In case of insurance, selling may continue as three-year lock-in products unwinding ends in October. Outflows won’t end now – but they should ease soon,” wrote the Citigroup duo.

Prabodh Agrawal, executive director at IIFL Institutional Equities, believes there is further downside in midcaps. “The sharp fall in mid-cap stocks is not surprising, considering continued selling by retailers and DIIs, whereas FIIs focus on large liquid names. Retailers and DIIs are unlikely to turn net buyers in the near term,” he wrote in a strategy note on Monday.

The Citigroup analysts believe the domestic investors may start putting money into equities aggressively only after the markets move at least 15-25%, which seems unlikely this calendar year. Citi expects the markets to gain nearly 11% by December.

@nitinpshri