March mayhem suggests Indian equities losing sheen

MSCI India underperforms global indices for consecutive months

Indian markets seem to be losing their sheen, slowly. March has been one of the worst months for Indian equities, both in absolute and relative terms. In March, the benchmark Sensex fell five per cent, while MSCI India dropped 4.2 per cent. India was the worst-performing market in MSCI Asia-ex-Japan. The dollar returns from Indian equities continue to be lower than rupee returns. The divergence has only widened since 2012.

Strategists are referring to last month’s fall in the market as ‘mayhem’, as stocks across the board fell. While the Sensex fell five per cent, the small and mid-caps did much better. Both derivative and cash volumes were down during the month, even as foreign institutional investors (FIIs) remained net buyers in the cash market. Since February, FIIs have been buying in the cash market and selling in futures. Morgan Stanley's data show FIIs bought equities worth $1.43 billion in February (cash market), but sold $1.35 billion in futures. In March, FIIs bought equities worth $1.5 billion in cash but sold $483 million in futures.

 

According to Morgan Stanley, MSCI India underperformed the global indices for the second consecutive month in March. “The performance ranking slipped further to 17th position from 15th position in the previous month.” This would be India's worst monthly performance in two years. Even from a technical point of view, the Sensex lost momentum and was trading close to its 200 DMA (day moving average).

Interestingly, telecom and health care saw the highest inflows during the month, suggesting the preference for defensives. While much hope is being built around India's recovery, materials and utilities were the worst-performing sectors in March. Since the first rate cut announced by the Reserve Bank of India in January, the benchmarks have only declined.

The pattern in the market and the relative performance of India suggests the country's overweight position in global emerging market funds might come down if earnings do not pick up. Valuations have expanded on high expectations but from here, they cannot rise further.

The stable currency has been a big draw for overseas investors, but the risks to this are plenty. The dollar and rupee returns of MSCI India have been diverging since 2012 and the gap has only widened over time. Sanjeev Prasad of Kotak Institutional Equities says: “The overweight position of India among GEM (global emerging markets) funds may come under threat... Though India’s medium-term story is attractive and reform measures positive, investors might look at other markets more favourably and ‘funding’ could come at the expense of India on an absolute or incremental basis.”