Slowdown in domestic equity funds a risk for India: Chris Wood, CLSA

Indian markets are facing a risk that growing uncertainty about the outcome of the upcoming general elections will lead to a slowdown in inflows into domestic equity funds, which have been the main driver of the stock market since Prime Minister Narendra Modi was elected in May 2014, said CLSA’s chief strategist Christopher Wood in his weekly newsletter ‘Greed & Fear’.

“The latest data shows that such a decline is happening. This is clearly a growing risk in the short term, most particularly as many foreign investors will want to await the outcome of the pending elections,” said Wood.

Average monthly flows into equity market by mutual funds during January-June 2018 stood at nearly Rs 11,100 crore, but the average flow dropped to Rs 8,500 crore during July-December 2018. Mutual funds bought local shares worth Rs 6,800 crore in January and they have been net buyers of shares worth Rs 1,300 crore in February till Wednesday, data showed.


The issue, Wood said, is not only whether the BJP would win but also that if the BJP is re-elected in a minority government, Prime Minister Narendra Modi’s style in terms of running the government would be cramped.

The Hong Kong-based strategist said whoever governs India in the next five years will enjoy the dividends of significant structural reform implemented by Modi since 2014.

He said evidence of fiscal deterioration in India continues, with tax collections rising only 7% year-on-year in the first nine months of 2019-20, but neither the bond market nor the currency market seems unduly alarmed by this, even following the Reserve Bank of India’s rate cut last Thursday.

The central bank cut repo rate by 25 basis points on February 7 and changed policy stance to ‘neutral’ from ‘calibrated tightening’.

Investors seem to be taking the view that populist actions should be tolerated in the short term if they help get Narendra Modi reelected in the April-May general elections, said Wood.

As for sectors, the CLSA chief strategist said that growth in nonbanking financial companies (NBFCs) is undoubtedly slowing sharply as a consequence of the shock triggered by default of the triple A-rated IL&FS in September 2018.

With private sector banks looking to take market share from the NBFCs, it is not surprising to hear that prominent NBFCs are now lobbying to receive banking licences, said Wood.