Last Monday, when panicky foreign investors were dumping stocks, domestic institutions went on a buying spree and bought stocks worth Rs 4,000 crore. Is there a lesson for retail investors? (PTI)

On August 24, when the Sensex plummeted by a record 5.94 per cent, or 1,625 points, foreign investors were big sellers and pulled out Rs 5,100 crore from the market in just one day. While panicky investors were dumping stocks, domestic institutions took a different strategy: they went on a buying spree and bought stocks worth Rs 4,000 crore. Is there a lesson for retail investors?

Domestic funds take sudden crash in markets as an opportunity to take more bets. And they have done reasonably well. Don’t rush to sell if you’re a long-term retail investor, fund managers say. Instead, stay invested. Increasingly, when foreign funds dump shares and the market gets nervous, local institutions have stepped in and poured money. And it’s not always because of directed investments based on phone calls from Delhi. Big institutions such as LIC and public sector insurers are big players in the market. LIC invested over Rs 60,000 crore in the stock market last fiscal. Mutual funds with assets under management of over Rs 13,00,000 crore have been attracting inflows as never before with inflows into equity funds rising 5.67 percent to a record high of Rs 3,93,000 crore in July.

A closer look at the trend in inflows and outflows reveal the contrarian approach of domestic and foreign institutions in the market. During the month of August, foreign investors who normally have a short- to medium-term outlook, sold stocks worth over Rs 11,000 crore in three weeks. Take the case of domestic institutions which adopted a different strategy and bought stock worth Rs 12,000 crore. “Our investments are primarily situational. We have always been a contrarion investor. When the market goes up, we sell … and when the market goes down, we buy. Last year the trend of the market was a rising trend, so we made unprecedented equity profits,” LIC chairman SK Roy told The Indian Express in a recent interview.

The dictum is: when foreign investors sell, domestic institutions buy and vice versa. In the case of retail investors, as long as the fundamentals are right, they don’t need to press the panic button.

Using this strategy, LIC has booked a profit of over Rs 24,000 crore from the stock markets in 2014-15. LIC’s fund huge kitty — it manages assets worth around Rs 20,00,000 crore — came to the aid of the government’s disinvestment plans several times. It is also showing that it can in some ways match the investment muscle of some of the bigger foreign investors.

This could also be a reflection of the institutionalisation of the markets. More institututional money is set to flow into the market, the latest being the Employees’ Provident Fund Orgnisation. Labour minister Bandaru Dattatreya, who was recently in Mumbai to launch EPFO investment in stock market, said the PF investment into the stock market can go up to 15 per cent of the incremental deposit every year. As the EPFO gets around Rs 1,00,000-1,20,000 crore as incremental deposits every year, its investment in exchange traded funds (ETF) can go up to Rs 15,000-20,000 crore.

The domestic institutional play in the market can only get bigger, which can help offer a counter balance to foreign investors and protect retail investors to some extent.

Why are domestic players confident?

Their confidence stems from one crucial factor: sound economic fundamentals. The markets and the economy are in a much better position in 2015 than in 2013 when they faced a brutal onslaught. Fund managers say the current volatility has more to do with global risk aversion than with the health of our economy. Global markets are becoming increasingly integrated and risk is now spreading faster than ever before. However, India is better placed to weather a contagion with room for providing stimulus through rate cut, currency support through forex reserves and fiscal space opened by lower energy prices, said Ritesh Jain, chief investment officer, Tata Asset Management.

On Black Monday (August 24), while Dalal Street went into a tailspin in a sell-off triggered by the Chinese markets, Reserve Bank Governor Raghuram Rajan said, “While I don’t want to opine on the future direction of markets, I will say that relative to other countries India is in a good position….”

Unlike domestic players, foreign investors take into account different factors, including the performance and the interest rate movement in big markets like the US and China.

The RBI also gave enough indication on what it will do with the rupee and that it won’t target any level of the rupee to intervene to arrest its slide or gains. Against this background, what should an investor do? Global markets are likely to remain volatile and Chinese market woes are unlikely to be over. And US Fed rate hike plan is round the corner. The bottom line remains the same: if you’re an investor, stay invested. Domestic institutions are precisely following this principle. Sell-offs a la the August 24 crash are a good opportunity to expand the basket.

Domestic equity markets opened higher on Friday tracking strong global cues. (Photo: PTI)

9.51 am: Sensex was up 344.70 points at 26,575.89.

9.33 am: Shares of BPCL turned ex-dividend on Friday, for dividend of Rs 22.50 per share for the year ended March 31, 2015.

9.30 am: Sensex and Nifty were up 269 points and 88.05 points at 26,500.24 and 8,037.

Domestic equity markets opened higher on Friday tracking strong global cues. The BSE Sensex and NSE Nifty opened 311.65 points and 104.75 points higher at 26,542.84 and 8,053.70.

All the sectoral indices on the Bombay Stock Exchange opened in green.

Asian stocks extended their recovery into the final trading day of the week as investors cheered a second day of gains in Chinese and U.S. markets.

On Thursday, the key benchmark indices soared over 2 per cent on the back of strong global markets amid F&O expiry. The BSE Sensex and NSE Nifty gained 516.53 points and 157.10 points at 26,231.19 and 7,948.95, respectively.

Adi Godrej, chairman, Godrej Group said, “I am bullish on Indian economy. Volatility in global markets has not affected the country much compared to others. Implementation of GST will drive our growth to double digits.”

Global Markets

New York: Wall Street rallied more than 2 per cent on Thursday as strong US economic data and hints that a September interest-rate hike was unlikely fueled optimism that the worst of recent market turmoil was over.

London: Britain’s top share index rose on Thursday, recouping all of its losses from this week’s bruising sell-off after strong US data calmed global markets rocked by concerns over Chinese growth.

Tokyo: Japan’s Nikkei share average surged more than 2 per cent on Friday, helped by further gains on Wall Street after strong US economic data buoyed sentiment that had been shaken by fears of a China-led global economic slowdown.

China: The Shanghai Composite Index in mainland China rose 1.2 percent to 3,120.25, adding to its 5.3 percent gain Thursday, which was its first increase in six days, during which it shed nearly 23 percent.

Hong Kong: The Hang Seng Index was up 0.79 percent.

(With inputs from agencies)

Initiate ‘buy’ on Ashoka Buildcon with a target price of Rs 210 per share.

Our March-2017 based SoTP values the core construction business at 6.5x EV/Ebitda, given its strong execution track record but weak starting backlog.

We estimate the recent build-operate-transfer additions (part of Ashoka Concessions) to yield returns below the 12% IRR committed on investments made by SBI Macquarie, leading to a shortfall of ~R12 per share.

This levers the SoTP to recovery in traffic (lifting of mining ban, economic recovery). Investible funds form 20% share of our SoTP, which once invested could yield higher value.

The stock may be volatile in near term, but will eventually reflect strong sectoral growth prospects. We build in 14% revenue CAGR and flat Ebitda margin over FY2015-18e for the construction business.

For the BOT business, we estimate 1) a steady-state traffic growth of 5.5%, 2) WPI inflation of 4.5% and (3) ebitda margin gradually improving to average ~80% over the period of concession. We build in extension of concession period for Sambalpur (six years), PNG (four years), Dhankuni (three years) and Belgaum projects (three years).

Ashoka Buildcon is an integrated roads BOT player with a strong EPC business (nil debt, material third-party exposure). On the strength of its EPC cash flows, the company has been able to fund most of its R800 crore of BOT investments over FY11-15.

While these recent BOT additions have not lived up to their potential, contribution of mature BOT projects has made the overall portfolio well-funded. Its BOT portfolio has limited downside risks as 1) all toll projects have been commissioned and 2) exposure to long distance, south-north traffic (DFC) is limited.

The company can be the biggest beneficiary of an uptick in ordering in roads, given its dual business exposure and access to ~R1,400 crore of cash inflows over FY2016-18e. This can help multiply its ordering and order backlog over this period.

A sustained yuan devaluation could be a positive for India from inflation point of view, building a stronger case for interest rate cuts, says Saumil Shah, MD & Head (Equity Sales Trading), Bank of America Merrill Lynch, in an interview with Devangi Gandhi. Excerpts:

Market volatility has gone up in the last two months. How do you see the Indian market in terms of attractiveness?

Foreigners have purchased shares worth $7 billion year-to-day versus $15 billion last year.  If one were to analyse the inflows, a substantial part is made up of block deals, rebalance flow and public offerings. The huge overweight of 500-bps-plus that India enjoyed in global emerging markets (GEM)  funds has come down to 350 bps approximately as GEM funds have lightened their overweight on India. Since July, net inflows have been close to $740 million. As investors start looking at India from a macro perspective, the Iran deal has been welcomed and we expect crude prices to go down by $5-10 a barrel in the next 6-8 months as that supply starts coming in.

Commodity prices are under pressure on the back of China slowdown, which is very positive for India from the inflation point of view. According to me, a big positive for Indian market is the way gold is beaten down.

Of course, monsoon is a concern with the cumulative rainfall so far lagging 9% from the average. However, sowing has been encouraging and government has kept the prices under check by managing supply. The main concern at this point for the market is the pick-up in the economy and growth in earnings. Earnings growth in the recently concluded earnings season was disappointing with marginally negative earnings growth.

We expect the earnings to remain weak in the near term. This is likely to result in more earnings downgrades. Thus, the current valuation of 16.5 times is actually closer to 18-times forward. After this quarter, there will be adjustments for the fact that the economy hasn’t really picked up. The good thing is, with oil prices coming down, consumption is likely to pick up and government could likely meet the allocation towards infra spending — especially in roads and railways. So, one is very hopeful, towards beginning of the next year, we will start to see a pick-up.

The conclusion of the monsoon session where the government could not push through key Bills is seen as a concern by many…

It is definitely a major concern as it stalls the reform process. It is now very clear that it will take some more time for the government to get these Bills passed.  So, if you ask me, currently markets are definitely are a bit on the higher side of the band. The positives are there in terms of a better macro picture, but what’s negative is earnings and growth have not picked up. The critical factor which the market and investors are looking for is when they start to see a pick-up in infra spending and key reform Bills, such as the GST and land Bill, get passed.

If you look at India against other countries, India stands out — in terms of external debt to GDP ratio, current account deficit.  Fiscal deficit is under control and the rupee has managed to stand ground and outperform versus other EM currencies. Of course, what might change is emerging markets like Korea and Taiwan improve and their fundamentals start to improve and you may see a reverse flow of funds.

The other factor that is supporting the market is the interest of the domestic investor. Since last April, more than $10 billion has made its way into domestic mutual funds — this is a very big positive for the markets. At a time when gold prices are crashing, real estate as an investment is losing its popularity, fixed-income funds are facing lower rates going ahead, equities as an asset class definitely looks attractive.  You can’t ignore domestic inflows anymore and it is a space that we need to watch more closely.

The momentum in foreign inflows has surely slowed down…

The net incremental flow has been quite low because GEM funds are already quite overweight on Indian market. Even as the overweight may have come down from over 500 bps to 350 bps, it still persists. The money which really hasn’t come is from the global funds. Emerging market fund that is well overweight on India and the impact of oil and commodity prices coming down is already factored in.

So, there’s no new catalyst for an EM fund in absence of earnings momentum to invest more in India. But it would still stay invested in India due to its relative attractiveness. The case is not there for global funds to come in as against an India or EM dedicated fund as they await triggers like growth and earnings recovery. Ultimately, this will happen as reforms take shape and infra spending picks up.

What impact could a sustained yuan devaluation can have on Indian markets and foreign flows?

Theoretically, yuan devaluation can have a negative impact on Indian exports. However, it also signals that all is not well in China and could lead to further softness in commodity prices which is beneficial for India. A sustained yuan devaluation thus could be positive for India from a Inflation point of view, building a stronger case for interest rate cuts. Also, typically if investors form a view that China will further devalue its currency then it might scare away the foreign flows from China into India.  Although one will have to be careful and have a bottoms up approach. For example, textiles is a sector that competes with China and could be impacted negatively.

“Fed hikes that signal US recovery are positive for India,” Bank of America Merrill Lynch said in a research note. (Photo: PTI)

The three major events that are likely to drive the Indian markets in the coming few weeks are rate hike by the US Federal Reserve, corporate earnings and Bihar polls, says a report by Bank of America Merrill Lynch.

According to the global financial services major, if markets price-in a Fed rate hike, it will get easier for the RBI to cut rates by 25 basis points on September 29.

“Fed hikes that signal US recovery are positive for India,” Bank of America Merrill Lynch said in a research note.

As the US growth stimulates export demand, it will rein in global commodity prices and would support the Indian rupee by rekindling risk appetite for high growth in emerging markets.

Moreover, even if the Fed delays, the RBI is unlikely to wait until December as deflationary pressures are picking pace, the report added.

RBI Governor Raghuram Rajan, in his third bi-monthly policy of the fiscal, left benchmark lending (repo) rate unchanged at 7.25 per cent as also the cash reserve ratio (CRR) at 4 per cent.

The Reserve Bank of India has already reduced the policy rate by a total of 75 basis points, or 0.75 per cent, since January.

The other major factor that would impact markets is corporate earnings as they are likely to drive FPI equity flows.

According to the global brokerage firm’s equity strategists, “corporate earnings are likely to begin to turn up in September from June’s anemic 1 per cent”.

The report further said that the Bihar polls would have a bearing on the course of reforms.

“We see three major event risks playing out in the next few weeks that will drive Indian markets,” BofA-ML India Economists Abhishek Gupta and Indranil Sen Gupta said in the research note.

“First, will the Fed finally hike on September 17, as our US economists expect?; secondly, will corporate earnings begin to turn around, as our equity strategists expect? and finally, how will Bihar vote?, the report said.