Emerging as the best! How Covid-19 opened the floodgates for investments in India's equity market

The Covid-19 virus not only triggered a worldwide pandemic, but also opened the floodgates for investments in the countrys equity market.

All in all, not only did the overall capitalisation of India's domestic market increased, the country's key indices emerged among the best performing emerging markets (EMs).

Initially, the lockdown induced crash led to attractive valuations along with a global flood of liquidity and near zero interest rates in foreign markets. As a result, return on investment from several asset classes except equities vaporised.

Investors jumped from one assets class to the other, till the time even the US dollar became unviable due to the massive stimulus package. Accordingly, the funnelling of such funds into the emerging markets led to a net investment of over $22 billion into India's market till now in CY2020.

Besides foreign funds, the domestic lockdown, the biggest in the world, flooded the stock markets with over 60 lakh new retail investors.

Additionally, a considerable number enrolled through various schemes via the MF segment. Market watchers contend that these newbie investors saw the value in stocks beyond the pandemic induced slowdown and became the real beneficiaries of the up move.

Till now in 2020, Indian markets witnessed FPI inflows of $22,281 million, which is 55 per cent higher than the flows in the entire 2019 in USD terms.

However, the domestic MF houses pulled out over Rs 33,000 crore till November 2020.

"Valuations are at 2SD (standard deviation) over the 10 year average, hence there is some caution on this front. However as long as interest rates continue to be zero or near zero across the globe, P/E ratios could keep expanding to levels not seen in the past," said Deepak Jasani, Head of Retail Research at HDFC Securities.

In terms of purchase, FPIs initially preferred large cap stocks till October. Later on, they enlarged their purchases to include the mid and small cap segments.

Sectorally, IT, pharma, banks, FMCG, metals, realty and oil & gas stocks were bought the most by FPIs in this year.

Apart from very high FPI inflows in 2020, large number of new investor registrations due to the Covid-19 pandemic has also contributed to the uprun in the market.

"The huge stimulus rolled out by central banks across the developed world to tackle the pandemic in 2020 has certainly led to abundant liquidity. While it was expected that EMs would see strong FPI flows in 2020, the fact remains that only few emerging economies have seen such flows and India is one such country, especially given the slew of reforms undertaken in 2020," said LKP Securities' Head of Research, S. Ranganathan.

"Having said that, it cannot be denied that lakhs of young first time equity investors have opened DEMAT accounts during 2020 and have invested into direct equities which is also a reflection of financialisation of savings," Ranganathan added.

According to Gaurav Garg, Head of Research at CapitalVia Global Research: "Moving forward, FPIs may continue to concentrate in the Indian market for another 1-2 quarters.

"The factors like low Covid-19 case count, expected vaccine in the first half of 2021, fear of valuations may go even higher and economic return to the growth trajectory are expected to potentially fuel more development in the emerging markets such as India."