Investors are throwing caution to the wind on expectations Indian stocks will continue to rally on strong domestic buying. To Kotak Mahindra Old Mutual Life Insurance Ltd.’s Hemant Kanawala, that’s the biggest risk.
“Complacency that markets won’t correct is the biggest risk today,” said Kanawala, head of equities at Kotak Life, a venture between Kotak Mahindra Bank Ltd. and Old Mutual Plc, with $3.1 billion in assets. “No one is willing to analyze potential risks and factor those in their allocation calls, which is reflected in low volatility.” The India VIX Index, a gauge of expected stock-price swings, fell as much as 7.7 percent Thursday to a record low, declining 31 percent this year.
Global and local headwinds, including the introduction of a national sales tax in India and the progress of the annual monsoon, may hurt sentiment and prompt investors to sell, Kanawala said in an interview. Kotak Life Classic Opportunities Fund has returned 19 percent annually over the past five years, beating 72 percent of its peers and compares with the S&P BSE Sensex’s gain of 15 percent to a record high in the period.
Upward domestic investment
Domestic investors bought about 202 billion rupees ($3.1 billion) of Indian equities in the first two months of the year that began April 1 versus about 92 billion rupees in the same period a year earlier, according to the latest data from the Association of Mutual Funds in India.
However, fund flows into Indian stocks may reverse at any time and buyers should be more cautious, according to a Bank of America Merrill Lynch note on June 14. Investing in stocks at all-time high valuations on the assumption that buying will continue to provide protection from a fall may be dangerous, BofAML analysts Sanjay Mookim and Nafeesa Gupta said.
Still, the risk also offers opportunity, according to Harsha Upadhyaya, chief investment officer at Kotak Mahindra Asset Management Co. , a unit of Kotak Mahindra Bank. His Kotak Select Focus Fund has returned 22 percent over the past three years, according to data compiled by Bloomberg. “If the pace of money flows is slower than the pace of earnings recovery, it will give an opportunity for equity valuations to fall to more realistic levels,” he said.
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The Sensex’s 18 percent rally this year makes it the best performer in Asia. Domestic and foreign investors have poured a combined $13.5 billion into Indian shares since January, with stock buying boosted by a decisive win for Prime Minister Narendra Modi’s party in state polls in March. The focus now is on the effect on companies’ earnings of a new national goods and services tax, or GST, and on whether seasonal rainfall will benefit farmers.
“There needs to be more caution as the progress of the monsoon or implementation of GST could disappoint,” Kanawala said. “Any leveraged positions can blow up on your face.”