Chris Wood's Greed & Fear: India's Retail Inflows Helped Cushion Major Market Fall

The Indian stock market has not fallen more in recent days as a result of huge inflows by retail investors. Moreover, foreign investors will view any significant correction as an opportunity to add, Jefferies' Christopher Wood said in his latest 'Greed & Fear' note.

The Sensex and Nifty, India's benchmark indices, recovered most of the losses that investors faced following the worst market crash in four years following the election verdict in the next two sessions, Wood said.

In the first four months of this year, total domestic retail inflows into Indian equities, including direct retail trading and mutual fund inflows, have been running at more than $7 billion a month, according to Jefferies estimates. "This is why Greed & Fear’s major concern going into the election was potential action on the capital gains tax front."

In light of the temporary shocks, foreign investors will view any significant correction as an opportunity to add, Wood said. This is because of a combination of India’s outperformance in recent quarters and high valuations, according to him.

High valuations in the mid-cap space have meant that most dedicated emerging market investors are no longer overweight on the market, Wood said. "Indeed, it is the case that foreign investors have been net sellers of Indian stocks year-to-date."

With the Nifty MidCap 100 training at 30.7 times one-year forward earnings, compared with 19.7 times for the Nifty, there is an obvious risk of further corrections in the mid-cap space, the note said.

Given the election outcome, there will be a temptation for investors to tilt the portfolio more towards consumption plays relative to investment plays, the note said. This is on the view that the incoming government will focus more on populist measures, whereas the feature of the past 10 years has driven the fiscal deficit due to spending on physical infrastructure rather than transfer payments, Wood said in the note.