Dalal Street may have less support from domestic investors in 2019

Domestic investors have been buyers of Indian stocks since 2015

The good news for Indian equities is that despite global money getting tighter in the past 6-8 months, foreign portfolio investors (FPIs) remain optimistic on India.

Analysts at Nomura reckon India and Indonesia to be Asia’s new rising stars. A Mirae Asset report states despite possible short-term volatility, their outlook on India remains positive amid global trade tensions.

Yet, global brokerages feel a prolonged period of costlier money could prompt foreign investors to pull out of emerging markets, including India. In other words, the selling displayed by FPIs in 2018 may continue next year. 

The year 2018 was the first time FPIs turned net sellers of Indian equities in the last four years.

Despite this if India’s CNX Nifty has held up with gains of 3 per cent, domestic institutional investors (DIIs) — comprising mutual funds (MFs), insurance companies, banks and other large domestic investors — have a key role to play. They have more than compensated for the FPI sell-off, and their net inflows in 2018 are the highest since 2015. 

In February, April, May and October, when FPI selling was at its highest, DIIs bought into the selling (see table).

But this year, can DIIs offer the same support? 

India’s top fund managers say that is a tough question to answer. S Naren, executive director and chief investment officer (CIO), ICICI Prudential Asset Management Company (AMC), affirms it is difficult to predict how the flows will be. “We are very positive on SIP (systematic investment plans) as a theme in 2019. We think, especially during election years, SIP is the way to invest,” he added.

Vetri Subramaniam, group president and head of equity at UTI AMC, agrees and adds that flows by way of SIPs seem to be the only factor assuring visibility for now. “One part of flows which is reasonably certain is the SIP flows of Rs 7-8 billion a month. But what kind of lump sum flows and redemption can happen is tough to predict,” he said.

However, whether this is enough to counterweigh selling pressure from FPIs is doubtful. “Structurally flows can remain strong. But in the short term it’s possible that DII flows could slow meaningfully,” said Anand Radhakrishnan, managing director and CIO, Emerging Markets Equity, Franklin Templeton Investments – India.

According to Radhakrishnan, some moderation in the ticket size of SIPs is possible. “This is the first time we will see how SIP investors react to market correction,” he noted.

In addition, fund managers are bracing themselves for redemption pressure in the coming months. “While MFs are net buyers, gross numbers suggest that there has been redemption coming from old money,” Subramaniam pointed out. “The data from the past indicates that the prolonged period of underperformance does result in redemption,” he added.

For now, Radhakrishnan is banking on the buffer built over time to cushion the shocks. “Notwithstanding the incremental flows, 4–5 per cent of equity flows are in cash,” he said. However, he warned if FPI selling continued, the extent to which DIIs could support flows needed to be seen.

But this doesn’t make Naren lose faith in Indian equities. “We see 2019 as an accumulation phase for investing in equities through SIPs and STPs (systematic transfer plans), with a minimum three-year perspective,” he said.

Naren’s optimism is essential, given how flows from MFs have become the most important means of inflows, particularly from 2014. The data indicates that MFs’ net inflows have more than absorbed redemption or selling activities of other DII participants.

Therefore, with the MF industry’s relevance to DII flows significantly rising over the past four years, fund managers will play a critical role in keeping the equities market afloat.