India Equity Strategy: Color of Money: ETFs - Gaining prominence
Special focus. Foreign investors are increasingly using ETFs as the preferred
mode of investing into Indian equities. Currently we estimate that ETFs have
investments aggregating US$18 bn in Indian equities, accounting for about
7.5% of total FII holdings in Indian equities. Of this, we estimate that about
US$9 bn is held directly through country dedicated ETFs and the balance
through more broad based emerging market / international ETFs. Nearly 50%
of the India ETFs are benchmarked to the MSCI India, while the others are
evenly divided between the NIFTY and the Sensex.
• Going forward, we would argue for strucutrally higher volatility given the
ease with which funds can access equity markets using ETFs and their
increasing relative importance.
• Sentiment bouyant. Most indicators of investor activity in the equity markets
remain positive. Trading volumes and values, delivery volumes and
outstanding positions in the futures and options segment continue to rise. Our
money flow monitor suggests inflows into Financials & IT services and
outflows from Industrials and Consumer. Liquidity in the banking system
remains in deficit though and the yield curve continues to bear flatten.
• Pick up in primary activity suggests near-term consolidation. After a
sedate quarter, we estimate equity issuances to pick up significantly through
to the end of the fiscal year. Equity issuances aggregating more than US$6bn
are lined up for October alone. The pick up in primary market activity could
also imply increased volatility in the FX markets. FIIs have to provide upfront
the entire application money for IPOs. These flows may subsequently have to
be reversed based on the allotment pattern.
• Insider activity. Insiders were net sellers over the month..
Net buy: Kotak, HDFC, Wipro, ITC, M&M, Hindalco, Jaiprakash
Net Sell: Tata Motors, L&T, HDFC Bank, Dr. Reddy's Lab, HCL Tech,
Ambuja Cement, ACC, Jindal Steel , DLF
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