Summary: At a time when the foreign investors have been on a selling spree across most emerging markets, including India, flows from mutual funds via the systematic investment plan route and directly into equities by retail investors have supported the markets. However, according to analysts, the headwinds – inflation, rising interest rates and an upturn in the real estate cycle -- may dent flows into equities as an asset class going ahead. According to Jefferies, a record over 60 billion dollars retail inflow, through mutual funds and direct, into domestic equity over the last 12 months has helped absorb heavy foreign selling. But they believe retail inflows cannot be taken for granted. As trailing one year returns drop towards zero in another three to four weeks, the pace of retail inflows can reduce. History shows that a sustained property market boom and higher market volatility also impact flows, says Mahesh Nandurkar of Jefferies FPIs have, so far this year, sold securities worth 22 billion dollars. However, this has been met by a similar 23 billion dollar purchase by DIIs. Data shows that the domestic participation has broadened over the past 12-months with mutual funds retail-equity folio count and SIP accounts up by 29 per cent and 42 per cent, respectively. Retail investors are also turning to direct stock purchases. The number of demat accounts has gone up 63 per cent year-on-year. Brokerage Jefferies estimates an inflow of 36 billion dollars directly into stocks from retail investors over the last two years. Thus far in calendar year 2022, the S&P BSE Sensex and the Nifty50 have slipped around 7 per cent each. The fall has been less as compared to their global peers such as DJIA, NASDAQ, S&P 500, KOSPI, Hang Seng, Shanghai Composite, CAC 40 and DAX which have lost 12 per cent to 28 per cent during this period. This outperformance of the Indian markets, even in the correction phase, was possible due to strong participation in equities by the retail and MFs, analysts said. Besides Jefferies, Jigar Shah of MIB Securities India, too, believes that the retail participation could shrink going ahead as the RBI hikes rates and more investment avenues open up as interest rates go up. Acclording to Jigar Shah, Chief Executive Officer, MIB Securities India, tt will be interesting to see the May and June data. Markets are likely to crack again when RBI hikes rates in June, he says. Investors may shift to debt MFs, FDs, bonds Over the past decade, strong retail flows have coincided with declining/ low deposit rates, according to analysts at Jefferies, who expect the deposit rates to go above the 7 per cent level with a lag even if the RBI were to hike rates. Low property price inflation over the past decade has supported strong equity inflows. Property prices have started rising now and there is room for property market upturn, says Mahesh Nandurkar of Jefferies. Nandurkar adds the current surge in housing demand is end-user driven but a sustained upturn will likely pull in property ‘investors’ as well. This could negatively impact equity flows, he says. On Thursday, the markets are likely to remain choppy in a range ahead of the F&O expiry for May series. Stock-specific action, however, will continue.
