JPMorgan Sees Liquidity Risks On Rising Non-Institutional Investor Participation
MSCI India has been remarkably resilient through second wave, yet underlying market dynamics have been deteriorating: JPMorgan
Non-institutional investor participation has risen meaningfully in Indian markets, adding liquidity risks in the event of a correction, according to JPMorgan.
MSCI India has been remarkably resilient through the second Covid-19 wave (barely underperforming emerging market), yet underlying market dynamics have been deteriorating for some time, a report co-authored by Sanjay Mookim, head of India research; and Sonia Tewani, India equity strategist at the global investment banking company, said.
That, it said, is indicated by:
Foreign and domestic institutional participation is close to 14-year lows even as aggregate daily volumes are up three times since 2014, implying that retail/corporate/other participation has increased dramatically.
Delivery volumes remain well below pre-pandemic levels; volumes of non-delivery/intra-day/speculative trading have doubled in three years.
Percentage of daily volumes traded in stocks with market caps of less than $2 billion has doubled in a year and is meaningfully higher than pre-pandemic levels.
Proportion of BSE 500 stocks delivering weekly moves of +/-10% or more doubled through 2020.
India volatility index, or VIX, remains above 2019 levels and despite higher volumes, Nifty futures’ bid-ask spreads have doubled in three years. Higher participation in smaller stocks seems to show up in sell-side forecasts.
A change in sentiment or a decline in headline index, JPMorgan said, can lead to a quick withdrawal of non-institutional volumes. “With the market willing to look through the sharp Covid-19 wave, noticeable global equity correction remains a concern. Any of rising inflation, slowing Chinese monetary conditions or increasing rates could catalyze a drawdown.”
EPS Downgrade
MSCI India’s forward price-to-earnings (20.5x) remains 1.7 standard deviations above average, but is close to average premiums to emerging markets valuations, JPMorgan said.
“Our bottom-up estimate for equity risk premiums has fallen sharply, implying that markets have fully priced in the 200-basis point decline in local bond yields. Earnings revisions have turned marginally negative (after rapid upgrades in second half of 2020). The second Covid-19 wave, weak consumer sentiment and margin pressures from increasing costs are likely to drive further EPS downgrades.”
Preferred Themes
JPMorgan remains ‘underweight’ on consumer discretionary in the near-term. Economic recovery beyond will likely have to be driven by India’s low interest rate environment. “We therefore favour the rate-sensitives such as banks, real estate and, in time, autos for the longer term.”