Mutual funds beat foreign inflows, turn new drivers of stock market growth

The domestic liquidity super-cycle is showing no signs of weariness, and is propelling markets to new highs almost every other day. All this is a credit to domestic institutional investors (DIIs), dominated by mutual funds (MF), that have bought Indian equities worth Rs 1.57 lakh crore since April 2017.

DIIs as a group have extended their net buying streak to a record 17 months at a time foreigners have shown cold feet. With local investors bringing in heaps of money into equity-linked products, the stock market rally is finally being controlled by desi hands, snatching the mantle of ‘market influencers’ from foreign fund managers.

Domestic institutions, led by mutual fund companies, have completely over-powered foreign portfolio managers. 
Starting in April 2017, irrespective of foreigners selling or buying, DIIs have bought more stocks than they sold each and every month. As a result, even though foreigners have been net sellers on 13 months out of the 17 months between April 2017 and August 2018 (up to August 20), stock markets have hardly felt the pinch.

“At a time when foreign institutional investor’s (FII) are selling Indian equities, the continuous and steady flow of domestic money into stocks are not only cushioning the market and arresting steep volatility. Indian asset management companies and domestic institutions will play a far bigger role in Indian capital market,” Sundeep Sikka, ED and CEO at Reliance Mutual Fund said.

FIIs took out Rs 1.15 lakh crore in these 17 months, i.e. Rs 6,300 crore on an average. That selling has been shrugged off by markets as DIIs, led by MFs have put in net purchases worth Rs 1.57 lakh crore or Rs 9,300 crore on an average. DIIs are now on a record-breaking streak. Seventeen straight months of net buying last happened in 2007 when domestic institutions were net buyers for every month between November 2007 to March 2009. However, DIIs put in about Rs 97,000 crore at that time, which was less than the Rs 1.31 lakh crore sold by foreigners at the same time.

This time around, DIIs have beaten FIIs by a mile when it comes to investments. This is due to mutual funds, who have seen huge inflows. Between April 2017 and July 2018, pure equity mutual funds have received Rs 1.95 lakh crore net inflows. All this money went into domestic markets.

“Mutual fund equity inflows in the last three years have become one of the strongest counter-force for foreign investment in India thus giving more stability to the Indian capital market,” said A Balasubramanian, CEO, Aditya Birla Sun Life MF at AMFI Summit 2018.

The incessant flows from DIIs have pushed up valuations. According to Motilal Oswal Research, while the market soars to new highs, the Nifty trades at a forward P/E (price/earnings) of 18.8 times, at a 21% premium to its own long-period average. Nifty P/B (price/book) - at 2.8 times - is at an 8% premium to long-period average.

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Despite DIIs supporting and growing markets, some market participants are cautious. Some foreign brokerages indicate markets correcting a bit by June 2019. Morgan Stanley has a Sensex target of 36,000 (currently Sensex is over 38,000) by June 2019 and it assigns 50% probability. It also has a bull case (30% probability) of the Sensex at 44,000 if the market starts believing in a strong election result (one party has a clear majority). Its bear case (20% probability) is Sensex at 26,500 if global conditions deteriorate and the market starts pricing in a poor election outcome (a hung parliament).

Source: DNA Money