The risk of domestic fund flow reversing is rising, with share of equity flows in financial savings rising way above a decadal average and with 'predictable' flows to equities segment contributing less than half to this, said Jefferies in a recent report.
The global brokerage also pointed to regulatory action on derivatives as a trigger for reversal of fund flows.
In the report titled "Is $7 bn/month sustainable?", the analysts pointed out that the domestic equity inflows during 2024 are a "staggering" $7 billion a month (January to May 2024, to date), which would be twice what they were in the previous high and more than 3x as compared to a year ago.
Also read: India beats rest of Asia with highest foreign funds flow, domestic buying hits 4-year high in March
In calendar year 2024, equity flows are likely to account for 20 percent of the financial savings of an Indian household, the analysts estimated. This is much higher than the average of 6 percent (share of the total savings) seen over the past decade.
This was arrived at by taking FY24's financial savings of Indians--an estimated $375 billion--and assuming a 10 percent growth in equity flows in 2024. This would mean $85 billion in equity flows in 2024.
In this massive equity fund flow, the 'predictable' portion is about half, wrote the analysts.
The brokerage broke the inflows down into four categories: a) Direct retail trading in the stock market during CYTD saw net retail flows (via NSE) into direct equities at $8.8bn; b) Discretionary flows into MFs (i.e., inflows into MFs ex-SIP) at $5.8bn; c) Flows into MFs via SIPs at $9.3bn; and d) Flows via other sources such as equity component of insurance, etc. at $6.4bn.
"Of these four sources of flows to domestic equity highlighted above, the former two are market sentiment–driven and thus highly volatile. The latter two are based on sustainable sources / part of broader shift to financial savings, and we evaluate the size of the more predictable flows (SIPs, equity portion of pension schemes, i.e., EPFO & NPS, equity component of Insurance) at a total $40 bn/annum, or slightly under half of the current pace of domestic flows," the report pointed out.
The report also elaborated on the regulatory risk.
There has been a sharp jump in futures and options (F&O) turnover recently, with daily notional trade of $5.3 trillion, which is greater than 100 percent turnover of the Indian mcap; and three times the FY23 average, according to the brokerage's calculations.
Premiums (option prices) paid is much lower at $8.1 bn/day but it is still 20x what it was pre-Covid and is a high number on an absolute basis, the report pointed out.
"Regulators appear concerned on this heightened derivatives activity and any action can cause derivatives volumes to come off potentially impacting smid-cap stocks also," wrote the analysts.
The report said that if a domestic flow reversal causes a dip in the large-cap holding, foreign-portfolio investors (FPIs) may step in a limit the downside in this segment.
"The FPIs have been net sellers by $2.7 bn YTD in India. We estimate the relative positioning of the FPIs to be close to neutral vs. the traditional 2ppt OWT. The FPIs, however, tend to favor the larger caps, and any potential dip in Indian markets caused by domestic flow reversal could then favor the larger caps to Outperform," they wrote.
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