FPIs turn net buyers in Oct CHANGING ROLES Sensex, Nifty run up to a new peak Citi ups sensex target to 33,800

Foreign portfolio investors (FPIs) have suddenly become net buyers of Indian equities. Until Tuesday, they were net sellers of around ~6,500 crore for October. On Wednesday, they pumped in ~6,800 crore, the biggest single-day inflow since February, followed by ~1,700 crore on Thursday.

The strong buying was after the government announced a ~2.11-lakh-crore bank recapitalisation plan and ~7 lakh crore of investment in roads. The announcement — on Tuesday, after market closure — was taken positively by investors, with shares in the bank, construction and public sector undertaking (PSU) space witnessing sharp gains. “Indian equities are rising on the comfort that the near-term growth outlook might be stabilising, on the back of encouraging high-frequency data over the past two months, while there is a spike in longer-term optimism due to the series of announcements made by the government to support growth,” went a note from ICICI Securities.

Foreign investors have been huge sellers since the start of August, on concern of slowdown in the domestic economy and global risk-off triggered by the US Federal Reserve’s decision to trim its balance sheet. Between August 1 and October 24, FPIs pulled out ~28,330 crore ($4.5 billion) from the domestic market. The sale tally has now reduced to ~20,000 crore.

“Last week, saw a bit of catch-up buying by FPIs, following the government’s surprise stimulus announcement. They’d been continuously taking money off the table since August. The sharp rally in several stocks, especially PSU banks, caught them off guard,” said an official with a foreign brokerage.

October has seen mutual funds (MF) putting in ~8,300 crore. Since August, they have been net buyers by ~43,670 crore, providing critical support to the markets during the FPI sell-off. On a year to date basis, MFs have invested ~95,000 crore in domestic stocks, thanks to robust inflow into equity schemes. Till September, equity MFs had garnered a little more than ~1 lakh crore as inflow into these schemes. FPIs’ net investment is ~38,300 crore, about a third of MFs.

The BSE’s benchmark, Sensex, has gained 6.3 per cent in October and is on course to post its biggest monthly performance since March 2016, when it had gained 10.2 per cent. The National Stock Exchange’s Nifty has gained 5.9 per cent. On a year-to-date basis, the Nifty and Sensex are up 27 per cent and 25 per cent, respectively. Following the sharp rally this year, their valuations have climbed to multiyear highs. According to ICICI Securities, the cyclically adjusted price to earnings ratio is at its highest point since 2008. A worrying sign, as the earnings cycle has not picked up.

“If growth does meet expectations of robust recovery in the short term, then, given the attractive medium-longer term outlook for macro economic growth, the current valuations appear reasonable,” says ICICI Securities. EquityInvestment in ~ crore Market conquered a fresh peak for the fourth session on Monday, with the Sensex jumping 109 points, as stateowned lenders extended a rally and earnings optimism played out. The surge in buying interest took the 50share Nifty above 10,350 at the close.

The PSB stocks have been on a roll, especially since last last week, driven by the government’s ~2.11-lakh crore recapitalisation plan and encouraging quarterly earnings by more blue-chip companies. The Sensex rallied to a new all-time intra-day high of 33,340.17, surpassing its previous record. PTI Government’s measures on bank recapitalisation, infrastructure, and crop prices, coupled with domestic flows, would support India stocks, even as downgrades in earnings continue, Surendra Goyal, equity strategist in Citibank India, said in a note. It has raised the FY18 Sensex target to 33,800 from 32,200. Citibank now expects 13 per cent earnings growth in FY18, down from the earlier projection of 18 per cent .

BLOOMBERG