A tale of two investors
Divergent behaviour of two investors
September 2010 brings the divergence in behaviour of domestic and foreign
investors to 13 months. FIIs have bought a record US$14.6bn while domestics
have sold US$6.3bn in the past four months. Our feedback suggests that domestic
investors are worried about general economic imbalances and valuations while
foreign investors are chasing relative growth and yield differentials.
Chasing of yield differentials?
India, with close to 8% nominal yields, has seen a massive divergence from the
global government bond markets. While on the negative side, it could be said to be
on account of higher inflation in India, the positive spin is that despite a much
higher hurdle rate, investments in India continue to outpace savings. So long as
global yields continue to signal a poor economic outlook, the yield chase could
continue and might, indeed, be bolstered by falling inflation.
A bubble and a whimper?
The onslaught of foreign liquidity and a high level of cash with domestics could
lead to capitulation by domestic investors. Indeed, falling inflation would make the
real yield in India relatively more attractive. Given the heated-up economy, nominal
yields are unlikely to chase inflation as it falls and this could increase the inflow of
liquidity. However, liquidity would only lead to growing demand pressures.
Market view and portfolio tilt
After upgrading the market in May, we cut to Neutral in August, a poor move in
retrospect. While the market looks expensive with respect to history, there may be
more steam left, before it starts to correct. Sectorwise, we now advise hugging
benchmarks more closely, with an Overweight emphasis on domestic cyclicals. We
are moving to Overweight on electrical
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