The much-awaited market correction has been elusive because of unabated flows from foreign funds into stocks. With the dollar weakening and interest rates collapsing in the developed world, investors there are testing their fortunes in riskier assets like emerging markets, like India, and commodities. The underperformance of emerging markets vis-a-vis developed markets in the past decade has strengthened the case for picking winners here. India specifically has been a strong recipient of foreign flows because of the resurgence in domestic demand and lower cases of Covid-19. Foreign fund managers have also found comfort in the relative stability in the rupee.
In the past 10 months, it has been a case of foreigners pumping money into Indian stocks, while the locals trimming their equity holdings. Investor behaviour when the stock market hits all-time highs in the past is well-documented. Though 2020 witnessed record demat openings by first-time investors, there is no jostling to get on to the next multibagger. Investors, based on anecdotal evidence, are reluctant to make fresh investments. Investment advisors handling managed accounts are returning a portion of the money to clients because of the discomfort to deploy money at current levels. Mutual fund managers in charge of large schemes are privately relieved that there are more outflows from equity schemes than inflows. Their concerns are not be entirely unfounded with share valuations shooting through the roof but the FOMO (Fear of Missing Out) factor is holding them back.
For the rally to continue, it will be critical for foreign inflows to continue. Investors waiting near the exit door should could do better by tracking flows to gauge the direction of the market.