Why Markets Are Rising Despite Foreign Fund Outflows? Top Fund Managers Explain
Demonetisation has had a positive rub-off with for the capital markets.
Indian capital markets have recovered from the initial shock of Prime Minister’s decision to ban old high-value currency notes on November 8, 2016. The S&P BSE Sensex has risen nearly 6 percent since the lows seen on November 21, 2016, despite a fall in consumption and impact on corporate earnings.
Foreign funds have pulled out over Rs 30,000 crore from equities since November, hoping a rate hike by the U.S. Federal Reserve and pro-business proposals of president-elect Donald Trump will give them better returns. But that hasn’t dampened the sentiment in the Indian markets.
Kotak Mahindra Asset Management Company Chief Executive Officer Nilesh Shah says the fund house’s inflows in November alone equalled what they usually collect in a full year.
“The maximum fund flows were seen in November 2016 since the announcement of demonetisation. The current market rally is being fuelled by domestic retail investors,” Shah said during a discussion on ‘India The Way Forward’, organised by brokerage Axis Capital.
“On an average, nearly Rs 4,000 crore is flowing into mutual funds every month through systemic investment plans (SIPs). An additional Rs 1,000 crore is flowing in through systemic transfer plans on a recurring basis every month,” Shah said.
Not just domestic fund flows, the market is looking from a long-term perspective as change in business models and cost rationalisation after November 8 will bring in earnings growth, said Dharmesh Mehta, managing director and chief executive officer, Axis Capital Ltd.
Investors are chasing realistic returns, said Sunil Singhania, chief investment officer for equities at Reliance Mutual Fund, India’s largest fund house. “Today, they believe that even a 15 percent tax-free return is good. Investors are also aware of headwinds and factor in global and domestic risk.”
Themes For 2017
Rural consumption is going to remain the theme for 2017, said Navneet Munot, chief investment officer of SBI Mutual Funds. He sees investor interest in companies that have land and are involved with affordable homes, as the government pushes housing. Munot also sees growth in firms that provide access to credit, like non-banking finance companies.
For Mahesh Patil, chief investment officer of Birla Sunlife Mutual Fund, consumption and consumer durables will be the theme to chase in 2017. Private banks and non-banking finance companies are also on his list.
Singhania said he is looking at quasi financials, which include asset management, insurance and wealth management companies. He also suggests tracking companies into branded products as they can easily provide a 15 percent annual return on a three- to five-year horizon.
Budget Expectations
A standalone change in long-term capital gains (LTCG) norms could be negative, but a holistic view can give a better idea. If the government reduces personal income tax and increases LTCG, it would be seen as positive, since retail investors and public at large will benefit and they largely invest through mutual funds, said Mehta.
Shah said the government should look at doing away with tax loopholes in the market like bonus stripping, and tax exemptions on fixed income debentures or exemptions given to entrepreneurs or promoters on sale of their equity. “The market is aware of these loopholes and these should be done away with while retaining the current LTCG regime.”