FIIs bond with equities as elections eclipse earnings

Written by fe Bureau | Mumbai | Updated: Mar 6 2014, 04:19am hrs
Undeterred by the slowing economy, the Sensex on Wednesday soared to within100 points of its lifetime high of 21,373.66 points, taking a cue from the sentiment in global markets and fuelled by purchases of foreign funds betting on a stable government after the forthcoming elections to Parliament.

Foreign institutional investors (FIIs) continued to buy for the 15th consecutive session they have shopped for equities worth nearly $1 billion in this time. The pace of purchases has seen a distinct pick-up after they sold stocks through January and in the first half of February. FIIs now hold 26.2% in Sensex stocks, an eight-year high.

Meanwhile, the rupee remained strong at 61.75 against the greenback with foreign investors continuing to shop for Indian paper in the 10 sessions to March 4 they have bought $1.4 billion worth of paper and have now pumped in $4.5 billion into the debt market since the start of 2014. Much of the money has come into short-term paper including treasury bills and commercial paper (CP). In fact, FIIs have used up their quota of T-bills of $5.5 billion and have breached the limit of $2 billion for CPs. The inflows, market watchers say, are the result of high yields and moderate hedging costs.

With the currency appreciating in February, India was among the top performing markets globally in February in dollar terms, as risk appetite for emerging market assets improved. While the economy remains sluggish GDP grew at just 4.7% in Q3FY14 the silver lining has been the shrinking current account deficit, which came in at 0.9% of GDP in Q3FY14.

However, markets are being driven more by the belief the elections will throw up a strong coalition at the Centre. Summing up the takeaways from its India Investor conference, brokerage Citi pointed to recent opinion polls that show the NDA alliance gaining ground. While economic/business activity seems only moderate, corporates are increasingly waiting for the elections, and political pundits are making more aggressive election calls. For now, its elections over earnings, it reckoned.

Last week, BNP Paribas upgraded India to overweight from underweight; apart from a better earnings environment and an improving macro outlook, it highlighted the hope of a stable government.

Recent opinion polls suggest that the BJP-led NDA alliance is gaining momentum and is poised to get quite close to the magic number of 272, which we believe is the outcome most favoured by the equity markets, the brokerage wrote.

Kotak Institutinal Equities has noted that the outcome of the 2014 elections would gain even more importance if investors were to be wary about emerging markets for the next three to four months or longer. If the elections result in a formation of a stable government then India may be in a better position to withstand the storm, the brokerage said in a review..

On Friday, the 30-share index closed at 21,276.86 points, just about 100 points away from the all-time high it touched in January 2014. For the year so far, the benchmark has managed a marginal gain of 0.6% even as the US Feds QE tapering has seen outflows from the emerging markets. Bloomberg data show that the Sensex is trading at about a 3% discount to its historic average one-year price to earnings multiple. In 2014 so far, FIIs have bought about $600 million of Indian equities.