IPOs, weak FII flows to weigh on markets: CLSA

The Indian market is unlikely to make big strides in the near term due to the huge line-up of equity capital raising and selling by foreign institutional investors (FIIs). “With the expected weak trend in FII flows and continued high equity supply, Indian markets will likely end 2017 on a flattish/subdued note,” said CLSA in note dated October 9. The benchmark Sensex and Nifty on Tuesday closed at 31,924 and 10,017 respectively.

According to CLSA, FIIs’ overweight position on India is now lowest in almost five years. “The primary reason for FIIs to reduce India weight is that other cheaper markets in Asia like Korea, China and Taiwan are witnessing positive earnings revision and India’s earnings estimates keep getting downgraded,” it says.

FIIs currently are about 200 basis points overweight on India, which is “more so due to bottom-up reasons and not due to macro top-down reasons,” says CLSA.

Earnings upgrade possibility for Indian companies doesn’t appear likely in the near term, it says. “Foreign flows are unlikely to improve in the near term, as earnings momentum in the rest of Asia is far better than that in India and valuations are cheaper,” says the brokerage.

Since August, FIIs have taken out around $3 billion from the Indian market. The market has remained largely flat during this period because of strong buying support provided by mutual funds (MFs).

CLSA says equity issuances worth $4 billion (Rs 26,000 crore) could come into the market over the next three months. To support such high issuance, the Indian market will need the support of overseas investors, it says.

The brokerage says investors have raised concerns over potential fiscal stimulus coupled with the tax cuts taken by the government on oil. Also, the near-term issues with GST collections are raising doubts of expansion in fiscal deficit.

“A subdued or flattish end to 2017 for the Indian market looks increasingly likely. Tactically, we reduce weight on richly-valued Maruti and add to M&M and pharma in our model portfolio. Our long-term optimism on the housing-led economic recovery remains intact,” CLSA said in the note.