Domestic mutual funds and foreign portfolio investors (FPIs) are taking the capital markets to new peaks on a daily basis despite the contrarian play by insurance companies. Investments by bullish foreign inflows have crossed Rs 1 lakh crore in calendar year 2017 so far with domestic funds, aided by a spurt in systematic investment plan (SIP) kitty, also playing big bulls.
While insurance companies pulled out over Rs 10,000 crore in the fourth quarter alone, FPI investments in both equity and debt markets have touched Rs 108, 484 crore in 2017. Debt market has attracted the maximum inflows of Rs 62,301 crore while equity got Rs 46,182 crore in 2017. The increase in inflows in 2017 is significant as calendar year 2016 witnessed outflows of Rs 23,000 as US Fed indicated rate hikes. If the FPI trend continues in the remaining part of 2017, inflows could overtake Rs 256,213 crore investment in 2014.
However, mutual funds and insurance companies showed a divergent trend in their investment pattern. When taken together, domestic investments by mutual funds and insurance companies in the fourth quarter of FY17 were largely muted with an inflow of $ 0.2 billion. A closer look reveals divergent trends: Mutual funds invested $ 1.2 billion (around Rs 9,000 crore). However, it was more than offset by insurance companies which pulled out $ 1.4 billion (over Rs 10,000 crore).
Life Insurance Corporation (LIC), India’s largest investor in markets, made a profit Rs 19,000 crore by selling some of its equity investments during the year ended March 2017, a 73 per cent rise from Rs 11,000 crore in March 2016.
“We invested around Rs 40,000 crore in the equity market last year. We are not a player in the equity market. We are long-term investors. Our total focus is on long-term investments… and we are contrarian investors traditionally,” LIC Chairman VK Sharma had said.
LIC equity investments were around Rs 65,000 crore in 2015-16, but this came down to Rs 40,000 crore in FY 2017. The equity portfolio of the LIC is around Rs 511,000 crore.
“With markets scaling new peaks, investors have been putting money in mutual funds. SIPs have become a favourite investment tool for them. If you look at some of the stocks individually, they have appreciated in a big way. We don’t know any more rise in valuation is left out. So investors, who lost money in many previous boom periods, are turning to SIPs,” said veteran BSE dealer Pawan Dharnidharka. The BSE Sensex is now at 30,464.92, a 21 per cent increase from 25,181.447 on May 24, 2016.
“Domestic inflows picked up significantly ($ 1.8 billion) driven mostly from MFs ($ 1.5bn till April 27, 2017) through systematic investment plans (SIPs). Global growth outlook remain sanguine and going forward, we do not see any major risk to emerging market flows although the pace of inflows could slow down as commodity prices cool off and high probability of a US interest rate hike in June 2017,” ICICI Securities said in a report.
Strong emerging market inflows have resulted in outperformance of currencies against the US dollar. The rupee appreciated by close to five per cent in the last five months. “Indian equities benefitted from this dramatic shift in emerging market flows resulting in FPI inflows of $ 6.7 billion in the January-March period of 2017. “Domestic news flow (state and civic election wins for NDA and a growth oriented Union budget which exhibited fiscal prudence) supported FPI inflows into Indian equities,” ICICI Securities said.
The surge in foreign inflows has led to the strengthening of the rupee. A stronger rupee would have a negative bearing on the export oriented sectors such as IT services, pharma, textiles, automobiles and ancillaries. It could impair the improvements in exports being seen in the recent months.
“Stronger rupee will result in lower crude oil prices for the Indian economy. This in turn is expected to reduce the wholesale price inflation and will benefit aviation sector (importer of crude oil) besides other related products. Companies having foreign denominated debt will benefit from a stronger rupee. Remittances will be negatively impacted as they will deliver lower value when converted to rupees,” Care Ratings said.