Domestic flows at current run rate should be fine for market performance if the equity supply stays low, said CLSA.
“The current run rate should be fine for market performance, if equity supply stays low like at present ($1billion over the last two months vs last years average of $2 billion/month), but indications are that it may not,” said CLSA.
The firm said in a note that May equity flows at $1.9 billion, adjusted for arbitrage fund flows, were down 5 per cent month-on-month, showing that a stabilisation has likely happened, albeit at levels much lower than the $3-billion plus pace seen from August 2017 to March 2018. The firm said that the slowdown in fund flows was expected after the imposition of long-term capital gains tax and a dividend distribution tax of 10 per cent on equities from April 2018. The figure of $2 billion a month could be the new inflow level to be expected from hereon, said CLSA.
However, any further weakening of domestic flows could put pressure on midcaps, which are sharply down this year. The BSE Mid-Cap index is down 10 per cent so far this year while the BSE SmallCap index is down 12 per cent. In comparison, the BSE Sensex is up 4 per cent so far in 2018.“…for the market performance to sustain/improve, supply needs to be relatively subdued or FII flows need to pick-up. The latter may be tougher though, given the rising macro/political uncertainties in India,” said CLSA.
Besides worries over weakening macro, foreign investors have been largely bearish as valuations, despite corrections in between, have largely been expensive and earnings growth has been lacklustre. CLSA in a recent report had said that Nifty earnings declined 1 per cent from the year ago period in the January-March quarter versus expectation of 10 per cent growth, largely due to Axis Bank and State Bank of India. The firm had cut Nifty earnings per share estimate for FY19 by 3 per cent during the results season.
Foreign portfolio investors have net sold shares worth Rs 1,000 crore so far in calendar year 2018 (till Wednesday) while mutual funds have pumped in `57,700 crore (till June 1). FPI flows have been volatile this year. They sold heavily in February, April and May but were net buyers in January and March.