Locals Driving Indian Stock Market as Foreigners' Influence Ebbs – Bloomberg

Overseas investors’ sway over India’s $2 trillion stock market is waning. Surging flows into mutual funds have placed domestic investors in the driver’s seat, providing a buffer against capital outflows sparked by global shocks, according to Deutsche Bank AG.

The months in which foreigners sold Indian shares between January 2004 and April 2014 led to a median decline of 7 percent in the MSCI India Index, Deutsche Bank AG said in a report this week. Those losses have reduced to less than 1 percent since May 2014, when the shift in household savings toward financial assets started, the brokerage said.

“Domestic investors are providing insulation, which is helping smoothen market movements and offset any modest selling by foreigners,” Abhay Laijawala, head of research at Deutsche Bank in Mumbai, said in a phone interview. “The relative influence of foreign investors in determining market direction is waning.”

Indian stocks have rallied to records as investors embrace equities amid falling returns from property and gold, a traditional favorite. Withdrawals by foreigners last month didn’t stop the S&P BSE Sensex from rising above 30,000 for the first time as local mutual funds plowed 112 billion rupees ($1.7 billion) into stocks, data compiled by Bloomberg show.

Individual Investors

Accelerating domestic flows have begun to create a “powerful offset” against capital outflows, Laijawala said.

The MSCI India Index has fallen in nine of the 13 months in which foreigners pulled money from India since Prime Minister Narendra Modi’s win in May 2014, Deutsche Bank said in the report. That compares with the gauge falling in 30 of the 34 months in which they were net sellers during the January 2004-April 2014 period.

Individual investors have been a force behind mutual funds’ growing dominance since Modi took office three years ago. 

  • In April, equity plans took in 94 billion rupees, more than double the inflow from the year-ago month, data from the Association of Mutual Funds in India show
  • Investors poured 704 billion rupees into stock funds in the fiscal year ended March, a third straight year of inflows, the data show
  • Retail accounts in equity-linked plans grew by 5.8 million to 44 million in that period
  • New money and a buoyant market bumped up assets managed by equity funds to a record 5.47 trillion rupees at the end of March

The gush of liquidity has a downside — it is keeping market valuations elevated. The Sensex trades at about 18 times estimated earnings, the highest since 2010.

“A massive boost of domestic liquidity is imparting further push to the valuation,” Laijawala said. “Funds have taken over fundamentals.”