DII inflows, valuations silver lining in current downcycle, say analysts

Markets across the world continue to be in turmoil, marred by rising interest rates, record inflation, and supply chain disarray. Indian equities, however, have been relatively resilient to the current global downcycle as compared to their global counterparts.

For instance, a recent note by Motilal Oswal Financial Services highlighted that the MSCI India index has outperformed, surging 7 per cent over the last 12 months, as against the MSCI emerging markets index, which has declined 22 per cent during the period.

Going forward, experts remain sanguine on the domestic markets' ability to turn around, and believe robust domestic inflows, strong economic indicators, and cheap valuations will strengthen the markets.

DIIs offset FPI outflows
 

The relentless selloff by foreign institutional investors has been firmly balanced by domestic institutional investor (DII) buying. DIIs have pumped a record Rs 2.15 trillion into the cash market so far this year, while FIIs have pulled out Rs 2.7 trillion.

According to Naveen Kulkarni, chief investment officer at Axis Securities, India has gone through similar cycles of high inflation in the past, which has kept domestic investors unfazed.

“Domestic investors are actually waiting for things to settle down on a global scale. Given strong corporate earnings and cheap valuations, the narrative has to shift from macro challenges to what is happening on the domestic front. Once that happens, the markets can do very well,” Kulkarni said.

However, unusually high inflation in the developed markets has taken analysts by surprise. This, in particular, has made foreign investors jittery, he added.

Inflation risk
 

Analysts at Kotak Institutional Equities expect domestic inflation to peak over the next few months and decline in the second half of FY23.

However, if inflation surprises negatively due to higher domestic food and global fuel prices, the already high yield gap (difference between earnings and bond yields) can widen even more, resulting in further correction in market multiples commensurate to higher bond yields, they said.

Valuation comfort
 

With a 17 per cent drop in the Nifty50 from its record high levels, analysts believe markets are in the oversold zone. Besides, such a correction has removed froth from valuations, which now look reasonable and cheap.

According to ICICI Securities, the Nifty50 is currently at a one-year forward price-to-equity ratio of around 18 times, which is the lowest since calendar year 2016, excluding the brief Covid period.

"Uncertainty often leads to correction and once it subsides, the markets normalize. Hence, we suggest investors see the bigger picture. India is better placed than its peers with respect to growth and the ability to fight inflation. Hence, time is right to lap up quality stocks and use the buy on dips strategy," said Santosh Meena, head of research, Swastika Investmart.

India Inc and the economy
 

Buoyant corporate earnings and strong economic indicators also lend credibility to analysts' optimism in the markets.

For financial year 2022 (FY22), the profits of the top 500 companies doubled to around Rs 9.3 trillion as compared to FY20, Kulkarni of Axis Securities pointed out. Besides, Kotak Institutional Equities estimates net profits at the Nifty level to grow 14 per cent in FY23 on recovery in auto and strong growth for banks.

"High-frequency indicators like manufacturing & services, exports and goods and services tax collections in the current quarter also hint at robust economic recovery, which should gather momentum going ahead," said ICICI Securities.