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Indian equity indices have been remarkably resilient despite the sharp second Covid-19 wave in the country. However, JPMorgan in its latest research report has said that the underlying market dynamics have been deteriorating for some time.
The report hints that while the gross market volumes have tripled since 2014, the institutional participation (foreign + domestic) is close to 14-year lows. This is even as the aggregate daily volumes are up 3x since 2014. What this indicates is that retail/corporate/other participation has increased dramatically.
Deteriorating market internals
Brokerage houses point at how the daily transaction volumes on Indian exchanges have doubled from late 2019.
Institutional participation in these volumes has rapidly declined. Institutional volumes are up from c.$2.1 billion a day in April 2014 to about $3.4 billion a day now. This indicates a large increase in market participation by retail, high net-worth individuals, proprietary desks, corporates, and other participants.
JPMorgan report mentions, “Increased retail participation adds beta and liquidity risks to the Indian markets. A change in sentiment/decline in the headline index can lead to a quick withdrawal of non-institutional volumes. ”
What can lead to investors’ sentiments changing?
JPMorgan says that with the market willing to look through the sharp Covid-19 wave, a noticeable global equity correction remains a concern. Rising inflation, slowing Chinese monetary conditions or increasing rates could catalyse a drawdown. However, until that happens, stocks with momentum or short-term themes continue to break valuation restraints. What may also dent sentiments going further is the likely impact of the second wave on corporate earnings.
In terms of corporate earnings, the JPMorgan report says that earnings revisions have turned marginally negative after rapid upgrades in H2FY20. It adds that the second Covid-19 wave, weak consumer sentiment and margin pressures from increasing costs are likely to drive further EPS downgrades.
JPMorgan’s outlook on the economy
Economic recovery beyond will likely have to be driven by India’s low interest rate environment. We, therefore, favour the rate-sensitives including banks, real estate and, in time, autos for the longer term. We remain underweight on consumer discretionary names in the near term.