Indian shares snapped a run of three weekly gains amid investor unease over North Korean crisis, which could trigger a wider conflict with consequences for the global economy, but surging household savings into domestic mutual funds should provide a spring board for the market to hold up.

Assets under management (AUM) with funds soared in August to a record Rs20.6 trillion, or about $322 billion, as inflows climbed three per cent from the previous month, according to data from the Association of Mutual Funds of India (AMFI). A greater share of domestic savings is flowing into financial assets driven by falling interest rates on bank deposits and a government crackdown on accounted cash hoardings.

Income funds were the recipient of the lion’s share with 42 per cent, following by equity funds at 28 per cent and liquid/money market funds at 17 per cent. Net inflows between April and August are nearing Rs2.5 trillion, AMFI figures showed.

The government’s demonetisation of high-value bank notes last November, which have drawn criticism for not achieving its objectives, has contributed to “an improvement in households’ financial savings”, the central bank said in its annual report. Inflows between November and June rose to Rs1.67 trillion, compared with Rs91.6 billion in the same period a year earlier.

“We remain of the view that India is in the midst of domestic liquidity super cycle,” Morgan Stanley India strategists Ridham Desai and Sheela Rathi said in report to their clients, after August registered a 17th straight month of positive flows for funds.

Flavour for risk

Equity funds received inflows of $3.9 billion, the highest for any month, and including Exchange traded funds (ETFs) the total was $4.1 billion, the US investment bank said. For the year-to-date, the flows into equity funds were $18.6 billion, while ETFs got $2.6 billion.

“By the end of the month, equity mutual fund AUM stood at $111 billion, and as a percentage of market cap rose to 5.3 per cent, its highest level since July 2000. Similarly, equity ETF assets rose to new highs of $8.4 billion,” the Morgan Stanley report said.

Fixed income AUM rose to $211 billion at end-August from $202 billion in the previous month, it added.

The top-30 Sensex ended the week down 0.6 per cent at 31,687.52, while the 50-share Nifty shed 0.4 per cent to 9,934.80.

State-controlled pension funds National Pension Scheme (NPS) and Employees Provident Fund Organisation (EPFO) are also increasing their exposure in equity markets to improve their returns, which should also underpin the stock market.

“NPS’s pension assets stood at $30 billion at the end of July. We estimate their equity assets to be at $3.5 billion,” Morgan Stanley said. “As per our estimate, EPFO could likely invest Rs250-300 billion in equities in fiscal 2018, of which Rs57 billion have been invested this year thus far.”

EPFO, the largest pension fund, has raised its equity allocation to 15 per cent in 2017-18, from 10 per cent in 2016-17.

Brokerage picks

Securities house CLSA is upbeat on Eicher Motors Ltd, which makes hot-selling Royal Enfield motorcycles. “Order inflow remains above production and is growing at 15 per cent year-on-year on same-store sales growth basis. This is despite multiple disruptions such as demonetisation and transition to GST in the last one year,” it said in a report.

The iconic brand’s production capacity will rise 40 per cent over 2017-19, and earnings are likely to grow at a compounded annual growth rate (CAGR) of 29 per cent over the next three years, the brokerage said, adding the company is rapidly expanding its dealer network to meet robust demand.

After CLSA set a price target of Rs39,300, the stock jumped to Rs33,483.95 on Friday before profit-taking pulled it down to Rs32,628.70 by close. Still, the share is up nearly 50 per cent so far this year, more than double the 19 per cent rise in the benchmark auto index.

“The stock is trading at 35 times one-year forward PE (price-to-equity) but its premium valuations should sustain given strong growth outlook and low competitive threat for Royal Enfield,” the brokerage said.

Eicher also makes trucks and buses in a joint venture with Sweden’s Volvo group.

Edelweiss Securities is staunchly bullish on discount carrier SpiceJet Ltd, the country’s third-largest airline by number of passengers ferried. It raised its price target on the stock to Rs150 from Rs138. The shares, which have more than doubled this year, closed at Rs129.30 on Friday.

SpiceJet, which pulled out of a nosedive to post profits for 10 consecutive quarters through a change in strategy and management, should benefit when a large order for 737 MAX aircraft join the fleet in a fast expanding market.

Operating cost is likely to fall with 15 per cent fuel savings and lower maintenance, and ownership costs might dip as well due to SpiceJet’s ‘staying asset light’ target, Edelweiss said.

India is the world’s second-fastest expanding aviation market, behind China. Although year-on-year growth in domestic market revenue per kilometre (RPK), an important measure, slowed to 12.5 per cent in July — the weakest since November 2014, there was a strong month-on-month increase in seasonally adjusted RPKs, the International Air Transport Association said in a report.

This enabled annual RPK growth to remain in double digits for the 35th consecutive month, it said.

Edelweiss expects SpiceJet’s RPK to expand at a CAGR of 18 per cent and earnings per share to jump 49 per cent.

K R Choksey Investment Managers initiated coverage of Jain Irrigation Systems with a “buy” rating and a price target of Rs162, a potential upside of 36.5 per cent from Friday’s close of Rs102.90.

The company, which has a 60 per cent market share, could see its revenue rise between Rs15 billion and Rs30 billion from the Maharashtra government’s decision for compulsory drip irrigation for sugar cane fields, the brokerage said.

It expects Jain’s net profit to climb 72 per cent CAGR between 2016-17 and 2018-19, thanks to lower interest costs after refinancing and conversion of debentures. Revenue over the same period is seen rising 21 per cent.

The writer is a journalist based in India.