FII Selling Slows in February: No Signs of Reversal, Experts Say:

The overall selling activity of foreign institutional investors in the February period may have decreased compared to January, but experts argue that there is no indication that the selling trend will stop any time soon. In the month of Feburary, FIIs were net sellers with inflows of almost $4 billion into India's secondary markets a decrease from the $9 billion sanctioned in January.

The Indian market saw heavy selling in February as the two benchmarks, the Sensex and the Nifty, dropped by 5.6 and 5.9 percent respectively. The broader markets suffered deeper cuts as the BSE MidCap index fell by more than 10.5 percent and the SmallCap index by 14 percent.

Interestingly, FIIs continued to be net buyers in the primary markets, spending about $824.99 million in February compared to $448.70 million in January.

There are mixed views regarding the ever awaited return of FIIs, Some analysts are more optimistic in expecting stronger markets in the US and even in China while dampened India's near-term environment and corporate earnings yo suggest that the weaker valuations will help FDI inflow residue. Other are adamant that selling by FII's was more liquidly driven with rather s shift in fundamental sentiment.

Rajesh Palviya, an analyst at Axis Securities, suggested that the lower FII selling during the month of February was not due to a slowdown in trading activity, but rather to a reduction in the number of trading days available. As per his views, there is no clear trigger for these FII’s to alter their selling strategy as it appears they have been consistent in selling regardless of the market adjustment.

He added that there can be a technical bounce in the oversold markets, but does not expect FIIs to participate in that recovery. He explained that weak economic growth, elevated valuations, increased earnings along with low economic productivity has been priced into the selling. He further noted that the continued outflows are mainly driven by the opportunity to earn risk free return in the US for tightening reallocation of funds and for FII’s moving away from India.

“This is an indication that foreign investors do not plan to buy immediately, but are willing to attend conferences in India to learn more about the market,” noted Kotak in their report. Many investors suggested that they were looking to position themselves should an attractive correction occur, or if their emerging markets fund inflows were expanded.

Some of them are noted to have viewed the markets from the lens of underweighting India without hedges and use that as a buffer. While that thesis is getting profitably executed vertically, they are also looking to take profit over large caps move in financial services, real estate, and e-commerce or quick service restaurants.

EM fund managers countered emerging market investments with optimism this year. Their optimism stemmed from the growing difference in valuation between US equities and other global equities. They are pessimistic, however, as growth rates are slowing and valuations are high. They also noted that the capital gains tax is becoming a greater concern now that expectations of returns around 20% are unrealistic in comparison to the previous years when equities consistently gave strong returns and the INR/USD were stable.

Choksey attributed the FII outflow from India to the necessity of withdrawing dollar funds from other emerging markets. He pointed out the weakness of the rupee, which has caused the exit of many leveraged fund. He argues, however, that most of the leveraged selling has already been done so, in his view, India is good for investments at this moment.

Fundamentally, Choksey's view of India is very strong considering the level of the currency and the valuation of the market which, with the Nifty's one year forward earnings, is strong at around 18x. Choksey explains that when there is a strong recovery, there is also a large potential for gains, meaning the market is bullish. Choksey dubbed the exit of FII investors troubling in terms of liquidity and speculated strong selling, therefore weaker liquidity even without FII would have led to larger outflows.

Asrah Bhamre, the Research Head at Asit C Mehta Investment Intermediates, is of the view that most of FII selling is behind us, and while selling may persist, its magnitude is expected to decline. He points out the correction in US bond yields and India's considerable underperformance globally as reasons for this. Bhamre continues to be cautious on the market, but thinks that the rate of incremental FII selling will slow down as the market becomes more valued. On FII timing of purchases he proposes that when domestic investors start selling, FIIs could come back to the market.