This report comes from this week’s CNBC “Inside India” newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big players behind its meteoric rise. Like what you see? You can subscribe here.
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A man takes a photo counting Indian rupee notes near the Bombay Stock Exchange (BSE) building in Mumbai, India.
Dheeraj Singh | Bloomberg | Getty Images
It is generally considered prudent to save a portion of your income for a rainy day. However, in India, it has resulted in stocks being overvalued.
Systematic Investment Plan (SIP) was introduced to help investors deposit money regularly and disciplinedly. SIP deducts cash from the investor’s bank account every month and invests the proceeds in selected mutual funds.
Vigorous and sustained marketing of the scheme over the past decade meant that 90% of contributions to domestic equity mutual funds last year were made through SIPs. Donations also hit a record high of 204 billion Indian rupees ($2.5 billion) in April, according to the Mutual Fund Association of India.
While the benefits of the scheme are clear, from reducing investment friction to eliminating the need for market timing, SIPs are also partly responsible for driving Indian stock market valuations to record highs, as they force fund managers to buy stocks regularly.
For example, while portfolio managers of India’s three largest multi-billion dollar equity funds – SBI Equity Hybrid Fund Regular Growth, HDFC Mid-Cap Opportunities Fund-Growth and ICICI Prudential Balanced Advantage Fund – have ample leeway to hold fresh deposits As temporary cash, their hands are often tied by their mandate and they are unable to fully invest the funds.
As more money flows into these funds each month, portfolio managers are forced to buy stocks even though their valuations may be less attractive.
“This particular product and, broadly speaking, domestic investors have driven the rally in Indian equities,” Mahesh Nandurkar, head of India research at Jefferies, told CNBC. “If funds Going into a fund, the fund manager obviously has to invest.”
He added that with underlying economics and corporate profits growing rapidly, SIP “has definitely pushed valuations higher”.
High valuations mean value funds, such as Federated Hermes’ $3.1 billion Asia ex-Japan fund or Schroders’ Emerging Markets Value fund, have been largely forced out of Indian equities. Jonathan Pines, head of Federated Hermes Funds, had previously said that mid-cap stocks in India Although the country’s economic prospects are promising, it is still in a “bubble.”
For example, of the nearly 4,900 actively traded Indian-listed stocks, 300 have experienced revenue declines in the past two consecutive fiscal years. However, 216 of those stocks have gained in the past 12 months, according to CNBC’s FactSet data.
In fact, small-cap companies such as food packaging carton manufacturers roller cart and Tandia Construction CompanyInfrastructure companies, which focus on railways, bridges, roads and airports, have experienced three consecutive years of declining growth. However, their shares are up more than 300% in the past 12 months.
Having said that, the positive impact of SIP currently appears to outweigh the negative impact.
Historically, foreign investors have had a significant impact on local stock markets. largest stock index, nifty 50 and SensexWhen financial conditions tighten abroad, the index suffers declines and outflows even as the index’s constituent companies and the Indian economy remain largely unaffected.
As the domestic investor base continues to expand, the impact of future turmoil in foreign markets may be even more negligible.
Deepak Jasani, head of retail research at HDFC Securities, said the monthly flow of funds from 87 million investors investing around $32 “helps reduce the volatility caused by (foreign portfolio investment) outflows and helps when FPI flows are positive or medium.” increase valuations.
There is more to do. Currently, savings invested in the stock market constitute only a small portion of the total annual savings of Indians.
According to Jefferies, Indians save about 18% of GDP, or about $800 billion, annually. Of this, only $40 billion, or 5%, is expected to flow into equities through SIPs, insurance and pension plans.
As investors become more comfortable investing in the stock market, an increase in the proportion and total savings is likely to bring more funds into the asset class.
“While India is a low-income country, it is still an economy with a very high savings rate,” adds Jefferies’ Nandulkar.
need to know
The Reserve Bank of India approves the highest-ever dividend to the government. this The 2.11 trillion rupee cash infusion announced on Wednesday was significantly higher than analysts and government forecasts. It will ease New Delhi’s need to borrow in the market and help it manage any welfare and capital expenditures.
Volkswagen is in “cooperation” talks for passenger car production. The German carmaker already operates two plants in India. The group’s statement partly reflected concerns about the risk of an escalating trade war between Washington and Beijing and the possible impact on European automakers, most of which rely heavily on the Chinese market.
Modi’s strongman rule has raised questions about India’s “democratic decline”. During Prime Minister Narendra Modi’s first two terms in office, India’s economy grew strongly and its geopolitical standing in the world improved. But observers and critics say the country is also showing signs of democratic backsliding that have become more apparent under his leadership. The Sweden-based V-Dem institute said a third term for Modi could worsen the political situation due to “continued repression of minority rights and civil society”.
Bank of America ranks three Indian stocks as Asia’s “most important” stocks. (Subscriber Content) An industrial giant, one of the largest private banks and an IT company have made it to the list of Wall Street banks. Backtesting shows the investment bank’s top stocks “have outperformed the market in 16 of the last 29 calendar years.”
What happened to the market?
Indian stocks rose more than 2% again this week. The Nifty 50 also gained about 2% last week and has gained 5.7% this year.
India’s benchmark 10-year government bond yield fell below 7% for the first time this year. As a result of the record central bank dividend mentioned above, bond markets now expect India’s deficit to be lower than previously priced in.
What happens next week?
India’s general election enters its seventh and final voting phase next week. Results are expected to be announced after vote counting begins on June 4.
It’s likely to be a quiet week on the data front, with US markets closed on Monday, May 27.
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