Volatility to test India’s asset owner interest in stocks

Local asset owners have been avid buyers of domestic stocks, but a set of political events and increased market volatility could force asset owners to question their appetite.
Volatility to test India’s asset owner interest in stocks

India’s local institutional investors have been avid buyers of the country’s stocks of late. But their commitment looks set to get tested. 

Ever since 2015, local asset owners have had a change of heart over local stocks. Whereas they once avoided the assets over concerns about volatility, the past two years have seen them bulk up in shares, seeking to benefit from predictions of improving corporate earnings and the country’s economic outlook.

That led local asset owner inflows to hit their highest in five years in 2017, reaching twice the volume invested by foreigners. 

But the new appetite of local institutional investors for stocks is about to be tested. During 2017 India’s stock market rose and had low volatility, but the coming 12 months will see state and general elections. It’s likely that equity markets will be choppy. 

That is set to force local institutional investors to decide whether they want to stick with the asset class, or pull back. 


Until 2015, the performance of Indian stock markets was dictated in large part by fickle foreign investors. In 2013 and 2014, these fund managers respectively poured $17 billion and nearly $15 billion into local stocks, causing market rallies. In contrast, domestic institutional investors mostly shunned equities as nothing short of a speculative bet. 

But the attitude of India’s asset owners has evolved as consumer inflation has slumped. It dropped from 11.1% in 2012 to around 4.4% in March this year, which in turn caused the benchmark 10-year government bond yield to shift around, sometimes down as low as 6%. As of mid-April, yield was around 7.4%.

In comparison, local equities have enjoyed an average 12% annual increase since 2010. That attracted local asset owners; last year they bought $14 billion in net equities, compared to about $7 billion by foreign investors.

“While foreign institutional investors had been selling Indian equities, for the first time domestic investors have been able to more than offset the outflows and invest in good quality stocks,” said Anurag Jain, chief investment officer at Canara HSBC Oriental Bank of Commerce Life Insurance Company, which has close to $2 billion in assets under management (AUM).

One of the most prominent has been the $34 billion National Pension System (NPS), a voluntary retirement scheme in India that receives money from private sector employees. 

For two years the fund has invested into stocks, mutual funds, exchange-traded funds and initial public offerings (IPOs). It’s believed to currently invest 16% to 18% of its total AUM into stocks, according to Sumit Shukla, chief executive of HDFC Pension Management Company. 

Equities are also attracting the Labour Ministry-controlled Employee Provident Fund Organisation (EPFO), which manages the $100 billion compulsory retirement pension scheme EPF. In 2015 it got the go-ahead to invest up to 15% of its incremental deposits into stocks, and by last year it had maxed this out after investing a little over Rs440 billion ($6.6 billion).

Companies that have their own trusts to manage employee provident funds (known in India as exempt funds or trusts) have followed, seeking to keep pace with EPF’s returns.

“In [2016], they … sought to invest at the minimum 5% level,” said Amit Gopal, managing director of India Life Capital (ILC), which advises pension trusts aggregating Rs280 billion ($4.2 billion). “But this year, we have seen some funds looking to take exposure to the highest level (15% of incremental flows), especially since markets have been done relatively well in the past few years,” he told AsianInvestor.

Such prominent support has helped India’s stock markets flourish. The benchmark 30-stock Sensex soared by 27% during 2017 to hit what was then a record high of 34,057. 


This recent local investor appetite now has to navigate some market volatility. After reaching 36,000-levels on January 25, the Sensex index slipped to 32,000 in February, before recovering to 35,415 by late April. 

Foreign investors still bought a net $1.4 billion in shares over the first quarter of 2018, while domestic institutional investors snapped up $4.1 billion. But there are rising concerns about the outlook for the next year.

The correction is partly due to upcoming market uncertainties. Oil prices (Brent) have risen from $53 per barrel to $73 over the 12 months to April, and fears in the net importing nation are that they could rise further, feeding inflation. 

India also has eight state elections scheduled during the year, and then a general election set for April or May 2019. That implies multiple event risks, as each will be seen as a referendum on Prime Minister Narendra Modi’s performance.

“If the election results, especially in key states such as Karnataka, are positive for the Bharatiya Janata Party (BJP), the markets are likely to rally. If not, you could see a market correction and more volatility ahead,” said Pranav Haldea, managing director of Prime Database, a local primary markets tracking firm.

He said investors were now betting on victories for Modi’s BJP. And leading institutional investors still seem interested in equities, at least for now. Some, such as Jain of Canara HSBC, see the recent correction as an opportunity. 

“Given the recent correction in equities, and accelerating growth outlook, risk reward appears favourable and we are positioned at the higher end of our equity allocation range,” he said. 

NPS and EPFO could add to their positions too, although for more strategic reasons. In February the Pension Fund Regulatory and Development Authority, which oversees the NPS, released a concept paper inviting feedback on its proposal to increase equity exposure from 50% to 75% for subscribers who want to decide their own pension asset allocations. 

A final decision is expected over the next three months, according to Shukla. “Once the new proposals are approved, that figure [NPS’s total equity exposure] will inch up,” he said, predicting that once other expected changes are factored in too (such as lifting equity allocations for government employees from 15% to 50%), its overall equity allocation could rise to 30% over the next five years.

NPS, which doesn’t manage assets internally, has appointed eight pension fund managers, including HDFC, to manage money collected under its various schemes.

Media reports say EPFO is now preparing to increase the fund’s equity allocations to 25% for higher income subscribers. The organisation did not respond to requests for comment. 

Harsha Upadhyaya, chief investment officer for equity at Kotak Mahindra Asset Management Company, said EPFO has been investing around $300 million to $350 million every month in equity markets via ETFs. “It is a structural trend that is likely to continue,” he told AsianInvestor. EPFO will likely need to keep buying equities simply to maintain a 15% position as its AUM keeps rising.

“EPFO’s experience of investing in equities has been good, and given that they are long-term investors, some market volatility over three to six months is not going to change that view,” Upadhyaya added. 

Look out for the second part of this feature, which was originally published in the April/May edition of AsianInvestor.

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