Too many bullish FIIs pose a risk to market: Morgan Stanley

Moneycontrol Bureau

Brokerage house Morgan Stanley is of the view that strong foreign institutional investor (FII) inflows pose the biggest risk to the market right now. However, there are several fundamental and technical factors that favor a market rally in the coming 3-6 months, Morgan Stanley has said in its note to clients.

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"In our view, FII flows are the biggest risk to the market. They have crossed 2% of market cap on a 12-month trailing basis, which has historically been a warning sign for prospective equity returns save for 2004, even as some investors argue that it is different this time," say Morgan strategist Ridham Desai and team in a note to clients.

"The trigger for a reversal of flows comes from a global risk off which is hard to time," the note adds.

However, Desai & Co see enough reasons to be positive on equities. Here are six of them:

1.So far, the market has done nothing in the front of the budget. This lowers the probability of a post-budget sell-off.

2. Our view is that the budget will reaffirm the path of fiscal consolidation and, therefore, a reduction in the current account deficit. This favors equities.

3. The 3M/3M (quarter-on-quarter) seasonally adjusted rate of inflation is suggesting a big drop in the headline inflation in the coming three months 

4. The implied equity risk premium – a reliable tool to forecast market returns – has reverted to strong buy territory.

5. We would have preferred more pessimism on earnings, but quickly add that for us the earnings outlook is still not optimistic enough.

6. Market breadth has broken down over the past two months. Market breadth is a contrarian indicator – when it is high, one sells the narrow market and vice versa.