I started writing this blog early last week but had to delay it for more than a week. The reason is not the availability of time but wanted to ensure that the blog title should not be construed as an innuendo to the 2 weeks drama in Tamilnadu Politics. Also, the kind of interest that people had in following this drama outside Tamilnadu and even in other countries would make anything else insipid.
I had mentioned in one of the earlier blogs that the outflow of money through Foreign Institutional Investors (FII) is countered by the inflow of Domestic Institutional Investors (DII), mainly retail investors. The flows from Retail investors has been increasing month on month as witnessed by the data provided by CAMS (Back office operating unit for major MFs) in the picture.
This can be interpreted in 2 ways:
- Retail investors have started accepting the fact the equity investments are the best for long term wealth creation.
- The returns from Physical assets like real estate, gold and financial assets like Bank FD have been dwindling and even providing negative results.
Whatever be the interpretation, Indian Investors have realized the importance of Equity investing. The proportion of investments or the Asset allocation is something that would vary based on age, risk appetite, risk capacity and so on. In the past, any pull-out by FIIs would result in a blood bath in Sensex and Nifty, even if it has nothing to do with our fundamentals. Now, the DIIs are able to counter the FII pull-out to a great extent as shown in the graph, which is one of the key reasons why our Indices were not majorly affected by Brexit or US Fed Rate Hike or Demonetization drive. All losses were recovered in a short period of time
The other concern that was prevalent was the run-up of Index values, not justified by the earnings of the companies, which was poor. Demonetization, resulted in reduction of consumer spending for certain sectors like FMCG, 2 wheelers, Consumer Durables and Telecom (more due to the Reliance Jio entry). After several quarters of mediocre earnings, the growth was expected to pick up in the Dec 2016 quarter. Unfortunately the demonetization drive overlapped with the earnings recovery season and the results were expected to be tepid.
However, if you go by the Q3 earnings released till date, the margins of companies have been expanding which is evident in the picture that shows the Q3 2015 performance Vs Q3 2016 performance. The recovery of commodities, energy sector and treasury gains helped to a large extent.
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