When locals lead

Foreign institutional flows into the Indian equity market in CY15 have been at its lowest level in four years, but domestic institutional investors bought Rs.65,000 crore worth of equities during the year, turning net buyers after three years of back-to-back selling. What has turned these serial sellers into serious buyers?

Local fund managers cite ‘attractive valuation’ as the primary reason for their renewed interest. “While the valuation in the mid-cap space has run ahead of earning estimates due to the sustained rally starting from 2014, the valuation in large-caps has turned reasonable,” says Sampath Reddy, CIO at Bajaj Allianz Life Insurance. Since CY14, the 30-share Sensex is up 21%, while the BSE Mid-Cap Index is up 64%. The fact is that the local buying spree has been made possible by strong inflows into equity mutual funds this year — in 2015 till November equity mutual funds have garnered Rs.87,000 crore.

Currently, most fund managers are positioning their portfolio for a revival in domestic growth. Future Generali’s CIO Jyoti Vaswani says her strategy would be to steer clear of global names and be more inward looking, focusing on companies exposed to the domestic economy. “We are overweight on sectors like auto and cement. We also remain overweight on consumer staples as we believe the sector would be a major beneficiary of the Seventh Pay Commission. Studies show that a large part of disposable income is spent on durables and food articles,” she says.

Bajaj Allianz’s Reddy is also putting his money into auto, consumer durables and sectors exposed to urban discretionary spending. “We also see some opportunities in private banks, infra companies and roads sector,” he adds. AK Sridhar, CIO at India First Life Insurance and Mihir Vora, CIO at Max Life Insurance expect engineering and construction companies to do well. “We expect the orderbook position of engineering and construction companies to improve with government spending reviving. These companies are available at attractive beaten-down prices,” says Sridhar.

Notwithstanding the valuation, where prices head in the next year will depend on how fund flows pan out. Despite domestic managers being on a buying spree, stock prices have headed nowhere. While bulk of DII inflows (60%) came in during the second half of CY15, the benchmark Sensex corrected 7% during that period.

No one is reading too much into the FII selling currently. They sold equities worth Rs.23,389 crore in the second half of CY15. Rajiv Shastri, CEO, Peerless AMC, says that FIIs are not differentiating India from its emerging markets peer group. “While India’s peers are net commodity exporters, India is a net commodity importer. So, while its peers are facing headwinds due to falling commodity prices, India stands to naturally gain from it.” While foreign investors may not take an isolated view of India when the general sentiment is to pull out from emerging markets, this time around there has been a technical factor.

“There has been an outflow from EM funds. As India’s weightage in the EM basket has gone up due to its outperformance, India has witnessed significant outflows.” says Sailesh Bhan, Deputy CIO at Reliance AMC. “However, all this has led to a correction in valuation and the timing can’t be better as the domestic economy seems to be on the verge of a cyclical upturn,” he adds. Notwithstanding local investor sentiment, the upturn and its reflection on stock prices will still be in question if foreign investors remain on the selling side.