| BNP Sensex May Trade At 24000 By December 2010
How far could liquidity drive the market? Liquidity typically drives markets and stock prices above fair valuation. During times of high liquidity (March-May'06 and Jan-December '07 for example), the market tends to trade at large premium compared to fair value. During May 2006 and Feb 2007 Sensex traded at 17-19% premium compared to our fair value, while at the peak liquidity of January 2008, it traded at 65% premium. We believe if the current run rate of FII flows continue (i.e. 0.4-0.5% of free float market cap), Sensex could touch 15-20% premium to our fair value estimate (19600 by December 2010).
GEM and AxJ funds getting good inflows
We estimate that currently GEM funds put together have slightly more than $200b in their funds and are getting $2b additional inflows per month into their funds. AxJ funds have $65-70b in their funds and are getting $1b per month. If they decide to maintain their current weights on India, simply additional inflows into their funds could lead to $280-300m monthly additional FII inflow into India from these two sources – nearly $120m from AxJ Funds and $160m from GEM funds.
But Global funds could contribute much more
Based on EPFR data we estimate that global funds (i.e. those benchmarked to MSCI World) have $1.7trn in AUM. Currently global funds put together have 0.65% of their assets in India – an underweight of 0.38% compared to the benchmark weight of 1.03%. Even if we assume no further inflows into global funds, purely their reallocation to neutral position on India could lead to $6.8b additional flows into India equities. If such reallocation happens by the end of 2010 – that could mean nearly $1.7b additional inflows per month till end-2010.
DIIs – still considerable cash with insurance companies
We estimate that MFs and insurance companies put together are sitting on $9-10b cash right now. We believe MFs have INR120-140b ($2.5-3b) cash in their portfolios (at the end of August 2010). We estimate that insurance companies put together have $7-7.5b cash in their equity portfolios (8% of equity AUM). Reduction of cash positions to 4% of equity AUM could induce $3.5b inflow into equity from insurance companies. LIC has gone on record saying it wants to invest Rs600bn ($12-13bn) in equities in FY11.
Our proprietary top-down model also predicts strong FII inflows
Our bottom up estimates suggest that India may continue to receive USD 2-2.5b of FII inflows per month in the near term (USD1.7bn from global funds; USD300m from AxJ and GEM funds and USD500-700m from ETFs, India dedicated funds and others). We construct a proprietary top-down model to estimate of FII flows into India.
Our 5-factor model incorporates global (VIX, crude price, US ten year yields) and country-specific (USD-INR and Indian 10-yr bond yields) factors. Our model predicts that the strong run-rate of FII flows could continue, albeit at a lower pace of USD1-1.5b/month.
Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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