Domestic investors’ stake in listed firms highest in at least 25 quarters

MUMBAI: Domestic mutual funds and insurance company holdings 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 capitalisation. Only 424 of these 500 firms, whose data goes back to 25 quarters, were considered for this analysis. That was a rise 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, MD and senior adviser, markets and advisory solutions, at Julius Baer Wealth Advisors (India) Pvt. Ltd.

In the September quarter, domestic institutional investments in local stocks was a record ₹41,507.41 crore; for the 12 months ending September, they were at ₹98,166.76 crore. The buying has pushed 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 GDP, inflation data and slow growth in earnings. Earnings will take at least twothree quarters to recover as Indian companies overcome the transitional woes caused by GST,” said Sanjeev Zarbade, vicepresident at Kotak Securities.

At current levels, Indian markets are more expensive than peers. The 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 (EPS) 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.

SINCE THE BEGINNING OF 2017, THE BSE 500 HAS GAINED 28.15%, OUTPERFORMING THE MSCI EMERGING MARKETS INDEX