Like other institutional investors AsianInvestor has spoken to of late, Gurgaon-based Canara HSBC Oriental Bank of Commerce Life Insurance is bullish on Indian equities, despite looming risks such rising inflation and potential market volatility amid forthcoming state and general elections.

With the Indian economy outpacing China's with growth of 7.3% this fiscal year that is set to accelerate to 7.6% by FY20, according to the Asian Development Bank, it's not hard to see why.

And all the more so given February's stock market slide, when Indian share prices broadly fell by 10% before staging a tentative recovery. This comes after the benchmark Sensex soared 27% in 2017 to 34,057; it closed at 35,141 on May 3 this year.

“Value has now started emerging in select pockets,” Canara HSBC OBC Life's chief investment officer, Anurag Jain, told AsianInvestor.

"Given the recent correction in equities and accelerating growth outlook, the risk-reward appears favourable and we are positioned at the higher end of our equity allocation range,” he said, without divulging how much of the insurer’s $2 billion under management is invested in stocks.

At the end of March 2017, Canara HSBC OBC Life had about $750 million in equity-related instruments (listed and unlisted as well as exchange-traded funds) as long-term investments to match its long-term liabilities, according to its last annual report.

In addition to the country's favourable economic backdrop, India has witnessed a stream of expectation-busting company results, prompting analysts to raise their forecasts.

According to a Credit Suisse Asia Pacific equity strategy report dated April 23, earnings per share growth in India is now estimated at 21.7% for 2018, up from 7.6% in 2017. That compares with forecast Asia-Pacific EPS growth of 14.2%.

In 2019, too, India’s estimated EPS growth of 17.9% is higher than the regional average of 10.6%, Credit Suisse said.

MORE SELECTIVE?

Jain is optimistic about the overall outlook for the market, despite a financial scandal involving state-owned Punjab National Bank that broke in February which has hurt share prices and and investor sentiment towards public-sector banks.

Bismillah Chowdhary, CIO of Edelweiss Tokio Life Insurance, is also bullish for the long term. He told AsianInvestor: "Over the next one year, equities could consolidate and remain range-bound, but over the medium to long term, India’s structural growth story will continue to attract investors to the stock market.” 

Equities and alternatives are likely to be the asset classes most likely to generate strong long-term returns, he added.

Other investment experts are more circumspect. "While company results have so far been good, there is growing discomfort on the macroeconomic front," Anita Gandhi, an executive director at Arihant Capital Markets, told AsianInvestor.

One of those concerns relate to rising oil prices, given that India is a net importer of the commodity. Brent crude prices rose from $53 per barrel to $73 per barrel in the 12 months to early May, and there are fears they could rise further, driving up inflation. 

Core inflation (excluding food and fuel prices) ticked up 5.19% in March, after remaining around 5% for the past three months, noted a Kotak Economic Reseach report dated April 13. It expects inflation by September-end to marginally overshoot the Reserve Bank of India's latest forecast range for consumer price inflation of 4.7%-5.1%, which was recently revised downwards.

Higher inflation may prompt the central bank to raise interest rates, which could affect corporate growth rates.

But infIation risk is not the only concern facing investors in Indian stocks. Markets are likely to experience heightened volatility, as eight state elections are scheduled for 2018 and a general election must be called by April/May 2019. There are concerns that if Prime Minister Narendra Modi's investor-friendly administration loses the elections, that could affect the reform programme.

CLOUDED OUTLOOK

Against this uncertain backdrop, it remains to be seen whether domestic institutions will continue to pump money into equities. 

Gandhi of Arihant Capital believes local institutional investors could become more selective. "The large investors have been taking some profits and will likely continue to do so," she said. "But they will also continue to invest in stocks whose valuations are reasonable and the business outlook is good."

Foreign investors have historically been the main drivers of Indian stock buying, pouring in $17 billion and $15 billion in 2013 and 2014, respectively, even as local institutions were selling. But since 2015 local players have have been steadily increasing their equity purchasing, putting in $14 billion last year, against $7 billion from foreign investors.

“This has changed the equation in favour of DIIs [domestic institutional investors]," said Jain. "Over the last many months, while FIIs had been selling Indian equities, for the first time, DIIs have been able to more than offset the [foreign investor] outflows and invest in good-quality stocks."

The shift in flows is also providing more downside support to the markets, leading them to be more driven by local factors than global issues, he added.

*This story has been amended to reflect the correct headquarters of Canara HSBC OBC Life Insurance Company.