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Should investors go with the ’flows’?

Author: Kumar Shankar Roy/Wednesday, April 10, 2019/Categories: Exclusive

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Should investors go with the ’flows’?

Inflows to India are sky-rocketing, after a lull. The month of March saw USD 6 billion coming in Indian stocks, the best show in almost 9 years. Indian debt markets too received USD 3 billion. What is fuelling this interest and how long is this expected to continue? Let us have a closer look to get the answers.

Mark to market

The strong show in March, and relatively reasonable inflows in April so far (till 5th) come on the back of sketchy outflows in previous months. If you include February 2019 numbers, Foreign Institutional Investors' (FII) trading activity in cash stands at net purchase of Rs 46,000 crore. This number is about the opposite of the outflows seen from July-August 2018 to December 2018. Clearly, the debt markets have been helped by a rally in the Indian Rupee (INR) and the RBI's announcement of 3-year Forex swap. Equity markets have rallied on the back of reduced uncertainty around elections. The equity part of flow puzzle is tough to crack because it is based on hope and projections. Simply put, 'hope' is tricky to decipher. So, basing investment decisions on merely 'hope' is a tough call.

Earnings cycle

Foreigners have different reasons to invest in Indian markers. Diversification may be one of the key reasons, because the fizz in the US may be nearing an end. Indian markets, both equity and debt, provide bigger zing amid a slowing global growth picture. But, Indian markets cannot rally based on hopes alone. This is something domestic investors too know. Headline earnings have continuously disappointed over the past 7-8 years, and yes, the change in political paradigm hasn't led to the big-bang acceleration in earnings. At this point, there is, again hope that India is set for a new earnings cycle, which would help market earnings compound at 20 per cent per annum. Autos, hotels, airlines and cement, banks, and real estate are getting a lot of attention. But all this excitement needs earnings power to move ahead.

Profits, not polls

Stepping into the new fiscal, the backdrop for Indian markets has been dominated by politics. All eyes are on the 17th Lok Sabha and whether it will have another majority government or a coalition government. By the end of May 2019, expect the dust to settle down. Politics has to make way for profits. This is where it gets interesting. The Q4 (January-March) earnings-report season, starting in a few days, is expected to be a repeat of Q3. Financials are projected to drive the performance single-handedly. So, the expectations of all-inclusive growth, etc. are not becoming reality in Q4, at least. Global cyclicals, which drove earnings rise over the last few quarters, have hit an air-pocket. But enthusiasm on the political front is making markets ignore these things. We have seen such times previously as well. A large part of the financial market likes the current regime led by NDA. They seem to be mostly factoring in an NDA victory. So, do remember any adverse election results can result in 10-15 per cent loss of Nifty.

Rate cut hopes

We have already seen the RBI cutting policy interest rate by 25 bps or 0.25 per cent in the most recent RBI meet. The narrative of strong flows is undoubtedly being helped by lower interest rates in India. Plus, RBI rate cuts support the INR. But, the question is how long and how low can we get? Rate cuts will be difficult to come from now on, as crude oil is approaching USD 70/barrel. The RBI has announced two rate cuts each in past three months given the benign crude situation at that point of time. So, the room for a further cut in interest rates looks narrow, given two important things: crude oil prices have jumped over 35 per cent from the bottom and monsoon picture uncertainty (rising El Nino risks impact Indian rains). So, expect the next rate cut sometime in June or even August.

Monthly FPI/FII Net Investments 12 months
Calendar Year INR crore
Equity Debt Hybrid Total
May-18 10060.03 -19654.15 -61.4 -29775.58
June-18 -4831.23 -10968.62 6.54 -15793.31
July-18 2263.92 42.79 -42.77 2263.94
August-18 1775.41 3414.07 -43.94 5145.54
September-18 -10824.7 -10198.47 -11.37 -21034.54
October-18 -28921.17 -9978.44 -6.07 -38905.68
November-18 6913.97 5347.15 5.35 12266.47
December-18 1670.13 3212.84 -2.29 4880.68
January-19 -5263.85 -97.12 2 -5358.97
February-19 17219.62 -6037.29 870.56 12052.89
March-19 33980.56 12001.63 2768.54 48750.73
April-19 (upto 5th) 8989.08 -355.27 639.86 9273.67
Source: CDSL


*The data presented above is compiled on the basis of reports submitted to SEBI/Depositories by DDP/Custodians and constitutes trades conducted by FPIs/FIIs on and upto the previous trading day(s).

Investor decision

With so much of enthusiasm and buoyancy around, it is difficult to ignore these noises. Only trained and professional investors can ignore the temptation. If you want to play the markets till the elections, you must reconcile to the fact that stock markets could change their direction very quickly once the poll results are out. If you are an optimist, you can be rewarded with a further jump in markets once the May 23 decision comes in. If you are a pessimist, now is a good time to book profits since everybody else is into buying. A balanced approach would be to distribute your trading strategy into defensives and momentum plays. The defensive stocks will provide a safety cushion during any market turmoil. The momentum i.e. high beta stock plays will deliver gain if markets perk up from here on.

The author is a journalist with 14 years of experience


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