Domestic Flows May See Short-Term Pause; FPIs To Provide Cushion: Jefferies

Domestic inflows that have been powering India's stock market may see a short-term pause after having pumped up valuations, according to Jefferies. However, the brokerage expects foreign flows to provide a cushion to domestic flows that may take a breather.

The Indian equity market has enjoyed strong performance primarily as the domestic flows have surged to all-time highs, the brokerage said in a note on Sept. 6. At over $7 billion per month, domestic participation in equities is high and already accounting for about 25% of financial savings, it said.

This could be an "unsustainable pace near term". But, the longer-term Indian savings financialisation and low asset holding of domestic investors in equities make domestic flows a structural story, Jefferies said.

Foreign flows into the market were limited, as domestic flow support has made Indian markets trade at high valuation levels, it said.

Strong relative performance has led to a rapid jump in India's weight in emerging markets' benchmarks, doubling over the past three years, Jefferies noted. Some FPIs' positioning has yet to catch-up and consequently, the brokerage finds foreign investors to carry a small underweight position on India.

Foreign institutions have been net buyers of Rs 53,859 crore worth of Indian equities so far in 2024, according to the data from the National Securities Depository Ltd., updated till the previous trading day.

"We believe that given strong fundamentals, including a potential earnings growth, any significant dips in Indian markets could see foreign flows picking up and as such dips could be limited."

The brokerage is cautious on the markets in the near term, due to expected tax hikes on equity capital gains, possible slowdown in government capex and potential policy risks.

The growth uptick in India over the last three years has been led by a capex cycle, Jefferies said noting India's strong macro story. The country enjoys a strong demographics profile, inflation has trended down and India's external account is well under control, it said.