In April, while the S&P BSE Sensex rose 1%, on a calendar year-to-date basis, the benchmark still remains in negative territory. This was due to poor returns in the first two months of the year. The S&P BSE Midcap and S&P BSE Smallcap indices had a much higher rise of 4% and 4.6% for the month, indicating higher risk appetite. Sectors which performed well during the month were real estate, metals and banks. Sectors which lagged the overall index during the month were IT and FMCG.
Foreign institutional investors (FIIs) invested $585 million during the month in Indian stocks. So far, FIIs have bought stocks worth $1.8 billion in the first four months of the calendar year. Domestic institutions were net sellers during the month of April. Insurance companies and mutual funds had net outflows of $323 million and $27 million, respectively, taking the cumulative tally to $351 million for the month. Year-to-date, DIIs have been buyers to the tune of $731 million.
Global GDP growth and financial markets remain on tenterhooks. Developed markets, with the exception of the US, are struggling to grow. Among emerging markets also, most countries are facing problems. China, which was fueling world GDP growth, has also seen a tapering of its high growth. In this scenario, central bankers have been following lose monetary policy. Even about eight years after the global financial crisis, interest rates and monetary policy have yet to return to their normal level.
Lose monetary policy can create problems for countries such as India. Easy money coming in inflates the price of many assets, both financial as well as physical. There is also a risk that once the interest rates start to rise in the developed world, this money can flow out of India. In the short term, asset prices can fall significantly as a result.
On the domestic side, the RBI has cut interest rates by 0.25% in April. Macroeconomic indicators such as trade deficit and inflation have also been declining, benefiting the economy. There have also been pointers to a turn in the economic cycle, with a number of data sets showing an uptrend. Sale of cement, automobiles, power consumption and freight rates have improved. The monsoon is also expected to be normal this year, which will benefit rural demand. This can also contribute to economic growth meaningfully.
We remain optimistic about Indian equities in the long run. Recent market correction has made the valuation of many stocks attractive. The S&P BSE Sensex has given negative returns on a one-year basis, and retail investors are exiting. Many foreign investors who bought on hopes of big-bang reforms post-elections are selling on being disappointed. If both FIIs and DIIs start selling, there can be a significant correction in Indian equities. India is unlikely to be impacted economically much from the unfavourable situation in other parts of the globe. In fact, it has been a beneficiary of a fall in commodity and energy prices.
Investors can look to add significantly to their weight in equities, given the above reasons. Earnings of companies are also bottoming out, and there could be a sharp jump in listed companies’ profits around the corner. This will result in better fundamentals for equities, which have been lacking so far. We see the risk reward situation attractive for Indian equities.
The writer is head of Quantum Long Term Equity Fund