The Curious Case of Nifty @10452

As nifty touched its all time high on Nov 3, 2017 at 10452, one would wonder if all's well with the Indian economy - only its not. In a year when supposedly more than 15 lac people have lost their jobs per CMIE (Center for Monitoring Indian Economy Pvt Ltd) and the economy is at its all time low of 5.7%, the stock market's behaviour is curious!

Reasons behind Nifty's rise

This month, nifty doubled its market cap to $2.2 Tn from $1 Tn Nov'14. It has provided a 53% return since the time NDA came to power in May'14 and a 30% return since Jan'17. All while the earnings growth and return on equity have declined continuously. Add to this the worsening bank NPA situation to Rs.8 Tn in bad debts, the stock market rise doesn't quite add up!?

A widely believed reason behind nifty's rise is falling returns from realty & gold is chasing domestic investors into the stock market. Some observers also believe that AMFI's (Association of Mutual Funds in India) SIP (Systematic Investment Plan) campaign has pulled the new generation to save via mutual funds. Lets look at some facts:

1. The number of SIP accounts increased from 52 Lacs in Mar'14 to 166 Lacs in Sep'17
2. The monthly SIP amount increased from Rs.1200 crores in Mar'14 to Rs.5516 crores in Sep'17
3. The total AUM (Assets Under Management) of the Mutual Fund industry increased from Rs.9.5 Tn in Mar'14 to Rs.21 Tn in Sep'17
4. More importantly, the AUM increased from Rs.16.51 Tn in Nov'16 to Rs.21.45 Tn in Oct'17

The post-demonetization increase in AUM is about Rs.5 Tn, a level unprecedented in the Indian mutual funds industry. This is most likely the single major contributor to nifty's new peak. Coincidentally, Rs.5 Tn was also the amount of black money that was expected to not return to the banks as part of the demo exercise, but it did!!

Reversing trend of FII-DII influence on Nifty rally

Historically, the purchase & sale by FIIs (Foreign institutional investors) plays a big role behind nifty's rallies & corrections. The below table provides data on the stock market rallies after the 2007 financial crisis, primarily driven due to "Quantitative Easing" by the central banks of US, Europe, UK & Japan.

In the first 3 cases and in every prior rally, whenever FIIs were net purchasers, Nifty rallied 30%. Surprisingly this was not the case in the last period from Nov'16 to Oct'17, when FIIs have been net sellers to the tune of Rs.55k crores, while DIIs (Domestic Institutional Investors) such as Mutual Funds, LIC etc, bought Rs.1 Lac crores worth of stocks. For the first time ever, DII purchase has pushed up Nifty by 31% to its all time high of 10452. Again, it is interesting to note that this coincides with the high cash availability of post-demo period.

Retail Investors - Is it your time to sell?

With crude price on the rise, inflation would come back, impacting CAD (current account deficit), currency (depreciation possible) and bond yields. While the real economy is still struggling with demo and GST effects, corporate earnings may not improve immediately. Currently, nifty is at a very high P/E (price to earnings) ratio of 26. Typically if one buys at this level, it may not provide returns higher than fixed deposits. If you are looking to cleanse your portfolio (stocks or mutual funds), now would be a good time to exit any laggards (while SIPs in carefully chosen MFs may continue) and wait to re-enter after a correction!