In a perplexing turn for the Indian stock market, Domestic Institutional Investors (DIIs) injected a staggering $90 billion over the last year. This substantial investment, coming from entities that now hold over 19% of Nifty 500 stocks, yielded an almost flat return, a surprising finding highlighted in a recent report by Kotak Institutional Equities (KIE).
With the exception of healthcare, metal, banking, and auto sectors, which saw modest gains of less than 5%, most other indices delivered negative returns. The IT sector, in particular, suffered a significant blow, with investor returns plummeting by 20%. Even the benchmark Nifty and Sensex experienced a decline over the same period, as noted by the report’s authors.
This lukewarm performance occurred despite a prevailing sense of optimism among retail investors, evidenced by their sustained and substantial investments channeled through DIIs. It also defied several popular market narratives, tax breaks, interest rate cuts, and even a 5% depreciation of the rupee.
KIE’s report argues that the combination of strong DII interest and stagnant market returns fundamentally ‘disproves the market’s ingrained belief in capital “flows” as the primary driver.’ Instead, it urges both institutional and retail investors to shift their focus towards fundamental factors like earnings and valuations. This insight is particularly noteworthy because many market participants, including mutual fund managers, have frequently pointed to increased inflows as a sign of confidence in the Indian market’s future potential.
Echoing sentiments from various market analysts, KIE reiterated that Indian markets generally remained overvalued given the subdued earnings growth reported by corporate India. However, the report did point out that valuations for certain banking and Non-Banking Financial Company (NBFC) stocks had become more appealing. Conversely, the authors highlighted that most large-cap and mid-cap consumption-oriented stocks were still trading at inflated valuations based on their 12-month forward price-to-earnings ratios.