As the Sensex briefly breached 53k mark and the Nifty is closer than ever to the 16k mark, one question stands large and looming – on the back of the second covid wave, where commodity prices and inflation expectations are high, the Indian equity and bond markets elevated. So what is leading Indian equities to higher benchmarks? UBS has released a report which seeks to debunk this pertinent question.
Per data tracked by UBS, retail inflow, both directly and through mutual funds, into the Indian stock markets, is at a decade high of USD 6.3 billion in the quarter ended March 2021. The reason, UBS believes, is largely two-fold: (a) a sharp surge in savings, partly due to lockdowns, since March 2020; and (b) a sharp drop in rates.
On the latter, UBS opines that the PE sensitivity is largely linked to Bank rates. With Bank rates witnessing a steep fall since March 2020, Indian households have moved towards the extremes of the risk band – cash and equities, leading to buoyancy in markets.
UBS further re-iterates its view by analyzing the December quarter, where some of the above factors had reversed: reopening coupled with consumption and savings slowing, was when retail flows had turned negative.
The report therefore states that, if the causes reverse, there could be a reversal in retail buying trends. In this regard, among the factors stated above, RBI policy normalization could hold the key. Perhaps one of the signals could be the SBI management recently assuring that deposit rates will not go down further.
More importantly, UBS debunks the numbers for quarter ended June could be important insofar as they will provide insight on the tolerance level of the Indian retail investor to hold on in case of market corrections / crashes. March-April this year saw a few corrections on the back of the second wave of covid.
The report also points out that the rising market may already be waning and that it is, in the last few months, largely being driven by the re-rating in the commodities/metals universe. The report hence concludes that the rally in commodities/metals is masking the sentiment in the larger market.
Given that an interest rate hike is a matter of “when” rather than a question of “whether”, it may relevant to see how the retail investment community responds to such an increase. Hence, overall, it may be interesting to watch out as to how the retail investment numbers stack up, not just in the current quarter but also going forward in the medium term.
