| Indian Equities Reluctant Return of Retail Investors | ||
· Politically action packed week had limited policy support for Indian equities
· 3Q earnings increased 3% yoy ( 20% ex Energy); only 32% surprised positively in our coverage universe
· Monthly indicators on inflation, growth and trade were supportive of equity performance
· Expectations from today’s vote-on-account is low
· Third consecutive week of FII selling of Indian equities; DIIs also turned sellers
· Retail investors seem to be making a slow come-back for equities; Domestic equity schemes saw net subscription for a third consecutive month
Local flavor. The world was less global last week. There were no over-riding global themes. Monetary authorities in most key economies seem to be switching from "the support" for financial markets to "a support". The new US Fed chairperson shared her reading of the macro situation on expected lines. In India, local factors of quarterly earnings, politics and monthly economic indicators were mixed. Our money flows indicator suggests buying interest in IT Services, Energy and Consumer Discretionary stocks. Consumer Staples and Financials saw selling interest.
Political actions offer limited support to equities. The ongoing Parliament session has been almost a washout for equities so-far. The Railway budget presented last week was expectedly a non-event. Expectations from today’s vote on account are also low. In an unexpected political development, Delhi’s chief minister - Mr. Arvind Kejriwal - resigned last week. It’s too early to assess the impact of this development on the national election. Various opinion polls have been indicating a better performance by the BJP-led NDA coalition. Election dates are expected to be announced over the next fortnight. Post the schedule announcement, the Election Commission’s code-of-conduct will start.
Low expectation support. Monthly indicators of growth, inflation and trade surprised positively last week. The main positive surprise has been on inflation. Composite CPI fell from a high of 11.2% in November to 8.8% in January. Lowering of inflation is mainly led by a sharp fall in vegetable prices. Core inflation remains sticky. Growth remains weak but there seems to be marginal improvement in sequential momentum. PMI manufacturing increased from 50.7 to 51.4 in January. PMI services remain below 50 but improved marginally from 46.7 to 48.3 month-on-month. One of the key recent policy achievements has been the resilience of the INR during the current EM sell-off.
3Q FY earnings – Export lift. 3Q earnings reportings concluded last week. The aggregate numbers look better –than-expected supported by significant beat from select export oriented companies. See below key highlights:
· Adjusted profit for the J.P. Morgan covered large cap companies grew 3% yoy ( 20% ex Energy). See sectoral details below.
· Export sectors fared better-than-expectations. IT Services companies (ex TCS) have managed to meet elevated expectations. Company managements indicated an improved demand environment for the year ahead. Most Health Care companies also surprised positively.
· Financial companies reported increased asset quality stress. The trend of SoE banks witnessing higher asset quality issues continued this quarter also.
· Only one large cap Consumer company reported a notable beat – Tata Motors. That also mainly driven by overseas business. Companies reported margin pressures on account of higher RM inflation and higher A&P spending, as revenue growth momentum moderated.
· Companies linked to investment cycle – Industrials, Utilities, Cement – disappointed , even on tempered down expectations.
FIIs and DIIs turn sellers. Global risk appetite seems to have stabilized. FIIs’ selling of EM equities moderated last week. There were net inflows in Taiwan and Indonesian equities. In India, the aggregate FII selling moderated to just US$17 mn vs. US$214 mn the week before. On the other hand, DIIs turned marginal sellers, implying that the retail investors could have been on the buying side. There seems to be some improvement in retail investor sentiment for equities.
Reluctant return of Retail investors. From the FII flows perspective, India has been extremely lucky over the last three years. Despite the well-known macro problems, India attracted the highest flows among EMs, thanks to the problems in other EMs and QEs. Now that the global liquidity situation is expected to tighten gradually, there seems to be two supportive developments for equities: 1. India’s CAD funding appears manageable 2. Indian retail investors’ aversion towards equities is not as overwhelming anymore. A few key facts highlighting the trend are:
· The direct retail ownership of BSE 500 universe increased over October to December quarter. The increase has been a marginal 20 bps to 7.8%. We highlighted this in our liquidity monthly “Color of Money”, dated 11 Feb 2014.
· Monthly subscription trend into equity mutual funds indicate three consecutive months of net subscription. (See chart below). The quantum of inflow is not as material as the switch from redemptions to subscription, in our view.
· The quantum of subscription is expected to remain anemic till we see increased conviction on growth revival. Medium term outlook on growth and domestic flows into equities remains uncertain.
In a capital starved economy, the preference of non-financial asset adversely impacts growth potential and equity performance. In a linked development last week, the SEBI chairman recommended various measures to boost domestic the Mutual Fund industry. One of the key proposals includes an additional tax incentive of Rs50,000 towards long-term investment product - Mutual Fund Linked Retirement Plan. Increased flows into domestic mutual funds would make the next government’s job relatively easy by providing the much needed domestic financial capital. First and foremost the "hope" capital needs to be revived, which has become far too dependent on not-as-important external developments, in our view. The next Government has a challenging job. Financial markets could make the Government’s job easy / difficult based on the perception of direction ahead.
Figure 1: Net Subscription into Mutual Fund Growth schemes
Source: AMFI
Figure 2: Annual subscription into Mutual Fund Growth schemes
Source: AMFI
Figure 3: Subscription into Gold ETF
Source: AMFI
Table 1: Quarterly Earnings Growth – Large cap companies
Sector
|
3Q FY13 PAT (INR bn)
|
3Q FY14 Adjusted PAT (INR bn)
|
Adjusted PAT Growth (% YoY)
|
Consumer Discretionary
|
47
|
82
|
74
|
Consumer Staples
|
38
|
43
|
12
|
Energy
|
231
|
156
|
(32)
|
Financials
|
158
|
145
|
(9)
|
Health care
|
22
|
35
|
58
|
Industrials
|
33
|
22
|
(33)
|
IT Services
|
86
|
117
|
36
|
Materials
|
42
|
67
|
60
|
Telecom
|
9
|
16
|
88
|
Utilities
|
52
|
58
|
12
|
Total
|
718
|
742
|
3
|
Ex Energy
|
488
|
586
|
20
|
Source: J.P. Morgan
Figure 4: 3Q earnings reports vs. J.P. Morgan expectations
Source: J.P. Morgan
Equity Strategy
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