India's domestic investors stock up despite shock from cash crunch

November 30, 2016 6:47 AM EST

People queue outside a bank to withdraw cash and deposit their old high denomination banknotes in Kolkata, India November 30, 2016. REUTERS/Rupak De Chowdhuri


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By Abhirup Roy

MUMBAI (Reuters) - Indian domestic institutional investors bought about $2.6 billion in equities this month, their biggest net purchases since at least 2007, showing faith in Indian markets despite fears about a cash crunch.

The net purchases were not enough to prevent the NSE share index <.NSEI> from falling 4.8 percent in November, as Donald Trump's election as U.S. president sparked heavy selling in emerging markets by foreign investors.

In India, they sold a net $2.67 billion, the biggest since at least 2002, according to clearing data. Foreign investors tend to hold larger blue chips, which have a stronger impact on indexes.

But the buying by domestic investors, including mutual funds and insurers, is raising hope they are not too spooked by the abolition of higher-valued bank notes on Nov. 8.

Although the action is likely to hit economic growth in the near term, as consumers hold back on purchases because of an ensuing cash crunch, some fund managers say improved tax revenues from unaccounted cash entering the mainstream economy will eventually benefit India.

Meanwhile, they cite attractive valuations and signs of recovery in domestic earnings as further reasons to stay invested.

"Once the government's fiscal balance improves quite substantially, the ability of the government to focus both on driving the consumption-led theme and infrastructure focus can be back to normal and become aggressive," said A. Balasubramanian, chief executive of Birla Sun Life Asset Management Co.

Domestic institutional investors bought a net 176 billion rupees ($2.57 billion) in November, according to data from exchange BSE Ltd, which goes back as far as April 2007, more than double the amount bought in October.

Other analysts also believe fears from the demonetization drive may be overdone. HSBC said on Wednesday it has retained its "overweight" rating on Indian stocks, saying it expected the impact from the cash crunch to subside in 4-6 weeks.

Once that happens, the bank predicted investors would return, drawn by structural reforms and compelling price-to-equity valuations of 15.8 times 12-month forward, roughly in line with the five-year average.

Meanwhile, Morgan Stanley has tipped India as one of its top picks, citing an expected recovery in earnings after low profitability in recent quarters.

Sunil Subramanian, chief executive of Sundaram Asset Management, said recent falls were a great way to boost stock holdings.

"This is a good opportunity to buy those stocks that you've already been accumulating for the last 1-2 years: those same stocks are now available at a cheaper valuation," he said.

"Nothing has fundamentally occurred to change the long-term growth prospects of either the economy or the companies."

(Additional reporting by Manoj Rawal; Editing by Rafael Nam)



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