DII holdings in BSE companies at their highest in 25 quarters

Mumbai: The holdings of domestic mutual funds and insurance companies in India’s largest listed companies rose to their highest level in at least 25 quarters as household savings shifted from gold and real estate to financial assets.

At the end of September, domestic institutions held a 10.8% stake in the BSE 500 index, which accounts for at least 90% of India’s market capitalization. Only 424 of these 500 firms, whose data goes back to 25 quarters, were considered for this analysis. That was an increase from 10.52% at the end of June and 9.6% a year ago.

“Post demonetisation, we have witnessed a distinct shift from physical savings to financial savings, and we believe that this trend will likely continue as traditional alternatives such as real estate and gold are no longer as lucrative as they used to be,” said Unmesh Kulkarni, managing director and senior adviser, markets and advisory solutions, at Julius Baer Wealth Advisors (India) Pvt. Ltd.

In the September quarter, net domestic institutional investments in local stocks was a record Rs41,507.41 crore; for the 12 months ending September, they were almost Rs1 trillion, at Rs98,166.76 crore.

The continued buying by domestic mutual funds and insurers has pushed local stocks to new highs. Since the beginning of 2017, the BSE 500 has gained 28.15%, outperforming the MSCI Emerging Markets Index. The gains for the Sensex and Nifty were slower at 21.5% and 23.8%, respectively.

Still, not every investor has bought into the India story. Foreign institutions’ net purchases during the 12 months ended September was $909.76 million, a fraction of local buying. The foreign institutional stake in these set of firms fell to 20.32% from 20.73% a year earlier. They have been on a selling spree in the last three months, shedding $3 billion on concerns of rich valuations and disappointing earnings growth.

Foreign investors “are worried about low gross domestic product, inflation data coupled with slow growth in earnings and rich valuations of Indian companies. Earnings will take at least two-three quarters to recover as Indian companies overcome the transitional woes caused by introduction of goods and service tax”, said Sanjeev Zarbade, vice-president at Kotak Securities.

Equity mutual funds added almost 5 million investor accounts in the six months ended 30 September, an all-time high, Bloomberg reported on 16 October. The Rs80,400 crore of net inflows during the period are more than triple the amount seen during the same stretch last year, the report said.

At current levels, Indian markets are more expensive than peers. Sensex and Nifty trade at over 18 times their one-year forward earnings. The comparable number for MSCI Emerging Markets is 12.8. Earnings downgrades haven’t helped. Earnings per share estimates of Sensex and Nifty companies for this fiscal year have been slashed by 10.54% and 8% respectively since April.

According to Kulkarni of Julius Baer, foreign investors are not necessarily reducing their exposure, but are re-adjusting their India weights.

“FIIs include long-only funds, GEM (global emerging markets) funds etc. While the long-only funds might have continued with their exposure, the tactical investors such as GEM funds might have reduced their India exposure, primarily because other cheaper markets in Asia such as Korea, China and Taiwan are witnessing positive earnings revision…This trend should reverse as and when there is an uptick in India Inc.’s earnings,” he added.