Since August, DIIs, including insurance companies, banks and mutual funds, have purchased shares worth $3.4 bn, which is one-and-a-half times more than what foreign investors offloaded during the same period.
Although foreign portfolio investors (FPIs) are currently on a selling spree, the markets have maintained their growth momentum on the back of excessive buying of equities by domestic institutional investors (DIIs). Since August, DIIs, including insurance companies, banks and mutual funds, have purchased shares worth $3.4 bn, which is one-and-a-half times more than what foreign investors offloaded during the same period. The resurgence of domestic buying has helped the markets to maintain all-time high levels. FPI selling in August accounted for the highest monthly outflow since November 2016 with the net investments currently standing at $6.8 billion so far this year. Taiwan and South Korea logged FPI inflows worth $8.1 billion and $6.9 billion, respectively on YTD basis. Nifty’s 24% rally since December, however, has pushed the market into expensive territory with the benchmark now trading at a price-earnings multiple of 18.2 times one-year estimated forward earnings – over 20% premium to the long-term average multiple.
While FPIs have been continuously booking profits, domestic institutional investors have turned buyers. In August, they shopped for stocks worth $2.4 billion, cushioning the market to some extent against sales by foreign investors. So far in September, again they picked up shares worth $1.02 billion. Between January and September 18, they have purchased equities worth $7.2 billion.
Gautam Duggad, head of research at Motilal Oswal Institutional Equities, observed that continued inflows in domestic funds, a benign interest rate environment, a stable currency coupled with favorable global cues is driving the markets higher. “Anxiety in global markets over North Korea has tapered off,” he said. Duggad further added the valuations are not euphoric; they are rich versus long period averages and therefore support from earnings pick up is critical to sustain these valuations going forward. Market watchers believe FPIs could continue the profit booking unless there is a sharp rebound in earnings growth.
Profits for FY18 are now expected to grow by just about1.5-2%, according to Kotak Institutional Equities, following the earnings downgrades in several sectors such as banks, metals & mining and pharmaceuticals. “We do not rule out further downgrades if the economy fails to recover quickly from the temporary disruption arising from demonetisation and implementation of GST,” the brokerage noted. It added that government expenditure can support GDP growth up to a point. Among the emerging markets, India has witnessed an outflow of $381 million in September so far. Indonesia has seen an outflow of $638 million while Taiwan has witnessed an outflow of $610 million.