Markets Resilient Despite Hefty FII Selling
S&P BSE Sensex have run up by a good 16% since last Diwali. Now, this massive run up has been despite the hefty selling by Foreign Institutional Investors (FII) in the recent months.
FIIs have withdrawn money to the tune of Rs 464 billion during the period beginning from August-17 till date. Despite this humongous withdrawal, the markets have just corrected by 0.4% during this period.
A similar withdrawal of FII money was seen in the financial crisis of 2007-08. FIIs withdrew money to the tune of Rs 499 billion in matter of three months from November-07 to January-08. However, during this period, the benchmark index corrected by a significant 11%. Considering the above data, the benchmark indices should have corrected significantly during the recent withdrawal by FIIs.
So, the golden question. Why did the markets not correct? The answer to this has been strong domestic buying.
Mutual Funds are seeing massive inflows. The inflows in mutual funds in FY17 at Rs 3.43 trillion were 155% higher as compared to a year ago. Post demonetization, the shift to mutual funds have been noteworthy.
There are a few reasons for this sharp jump. After depositing their monies into banks, as a part of the government’s drive to replace high denomination currency notes, there were limited attractive investment avenues. Returns on bank deposits have hardly been sufficient after considering the effect of inflation. Even gold and real estate turned out to be unattractive as there has been no clear sign of price improvement in the near future. HNIs and institutional investors, which predominantly invests in real estate, gold and fixed deposits, have now started investing in mutual funds given the higher returns than most traditional investment avenues. And this trend has sustained in the current fiscal year.
Currently, excess liquidity is driving the markets to new highs. However, earnings growth in the coming quarters would be the key things to watch out for. Sensex is trading at a price to earnings (P/E) multiple of 24.3 times and has already started to look expensive. If the earnings do not catch up, the p/e multiple could further shoot up leading to a significant correction in the equity markets.
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