Domestic investors drive show

By: | Published: May 15, 2017 2:40 AM

Since general poll, domestic institutional inflows have reduced vulnerability to FII selling; such liquidity could stretch valuations.

The inflow momentum is even stronger in balanced funds.

While Domestic institutional inflows into equities have become a dominant driver of Indian household savings over the past two years, they are now also becoming meaningful determinants of market performance. The surge in mutual fund equity inflows is beginning to insulate the Indian equity market, which has so far been largely determined by the velocity of foreign institutional inflows. Our analysis of monthly equity inflows and MSCI India performance shows that between 2004 and April 2014 (pre-national election), periods of FII selling coincided with MSCI India declining by 7% (median). Since May 2014 — which saw the beginning of the shift towards increasing financialisation of household savings — the decline in MSCI India during periods of FII selling has reduced to less than 1% (median), illustrating the increasing potency of domestic equity inflows and the powerful offset these flows have begun to create against FII selling. Indian equity valuations are increasingly getting made-in-India.

Domestic mutual funds’ equity inflow momentum accelerates

The new fiscal year has started with strong inflows into domestic equity mutual funds. Mutual funds’ Equity and ELSS (Equity Link Savings Scheme) schemes saw aggregate net inflows of `94 bn in April 2017. This is more than twice the April 2016 inflow and 61% higher than the past-12-month average. The trend is also interesting in the context of relatively lean seasonality for the April to June quarter.

Balanced funds join billion dollar club

The inflow momentum is even stronger in balanced funds. Aggregate net subscription of $1.1 bn is a historic high and the first billion dollar plus monthly inflow into balanced funds. These inflows underscore the overwhelming trend in the financialisation of Indian household savings as the Indian saver gravitates from physical to financial savings. In what appears to be a secular trend, subscriptions into Systematic Investment Plans (monthly annuities) have been rising consistently. The Association of Mutual Funds in India (AMFI) reports a monthly inflow of $650 million through SIPs (Systematic Investment Plans) in March, reflecting the increased interest in recurring savings allocations. Indian equity valuations are deriving dominant support from this trend.

Equity AUMs is not excessive in the historical context

Equity AUMs now constitute 26% of aggregate mutual fund AUM. To put in the historical context, on an average Equity AUMs has been 23% of aggregate mutual fund AUM over the last 15 years. The high was 37% in December 2006. If the economic growth momentum revives and retail enthusiasm builds further, there is a likelihood of higher share of equity AUMs for mutual funds, in our view.

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Monsoon showing and GST implementation uncertainties

Political developments have been favourable for risk appetite over the last quarter. The UP election result for domestic and the French presidential election for global investors have aided investor confidence. Going ahead, we expect market performance to be determined by the earnings trajectory and GST implementation. With no let-up expected in domestic equity inflows and in the absence of strong primary market activity, domestic liquidity could stretch market valuations.

— Deutsche Bank

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