Domestic Flows To Counter Any Likely Market Correction, Says Jefferies

Domestic flows will counter the likely correction that the Indian market might experience after the recent rally, according to Jefferies.

The Nifty 50 has seen nine corrections over the past decade, six of which included developed markets and eight correlated with emerging market declines, the brokerage said.

"Ex-Covid correction of early 2020, the Indian markets underperformed the emerging markets by an average of four percentage points, with three to six percentage points range usually," the brokerage said in a Feb. 28 note.

The corrections have been swift and were followed by robust subsequent rallies, averaging a 36% increase. Remarkably, during these rallies, India outperformed emerging markets by an average of nine percentage points, the note said.

In each of the last six corrections, India's outperformance over the MSCI EM has exceeded the previous underperformance. For instance, following the correction from December 2022 to March 2023, India has already outperformed EMs by 24%, Jefferies said.

Indian markets have also seen lower volatility, as evident in the beta for Indian markets declining over time as compared to the MSCI EM, the brokerage said.

Rise of domestic flows and the ensuing lowering of volatility is ultimately supportive of relatively higher multiples for India. Currently, Nifty trades at a 71% PE premium to MSCI EM ex-China, which is 12 percentage point above average, Jefferies said.

Light Positioning By FPIs Should Be A Cushion

Foreing portfolio investors' net buying of Indian equities worth $22 billion over the past 12 months comes amid a 5 percentage point increase in India's neutral weight in benchmark MSCI EM, Jefferies said.

"Our analysis of large EM active funds, though, indicates that India's relative positions are actually at decadal lows. While there is still a small overweight (more than 2 percentage point), the same has declined from a 4 percentage point OWT pre-2020," the note said.

As such, headroom for FPIs to take a larger overweight position could become an important flow driver, it said.

Rising Domestic Flows Have Tempered Volatility

Domestic flows into equity are pivoted by steady and rising SIPs. They usually serve to reduce India's correlation with the more volatile EM factor-driven FPI flows, the note said. During the mid-2022 sell-off in EM equities, the flows into domestic MFs of more than $30 billion matched the outflow from FPIs, keeping the market corrections shallow and making India a relatively consistent performer.

"Savings into equity is still a small chunk of the overall asset ownership pie for Indian households at 5%, as per our proprietary analysis. This number is 12–22% for DMs, which highlights the long-term potential," it said.