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According to analysts, the significant step selling by Foreign Institutional Investors in February compared to January is not showing signs of reversing itself any time soon. In February, FIIs were net sellers at nearly four billion in India's secondary markets, a decline from the nine billion sold in January. Investment in India continues to witness opportunistic activity by FII with lower valuations in the Indian market.
Indian markets saw substantial selloff during the month of February, with the benchmarks Sensex and Nifty slipping by 5.6 and 5.9 percent respectively. The broader market declined even more significantly, with the BSE MidCap dropping by over 10.5 percent and the SmallCap index crashing 14 percent.
Notably, FIIs also remained net buyers in the primary markets investing around 824.99 million dollars in February as compared to 448.70 million dollars in January. This is a clear indication of shift in FII into Indian equity.
Stock markets everywhere are struggling to find new sources of excitement and growth. While everyone is anxious to see an FII comeback, the sentiment remains mixed. Some gloomy observers point to slugs like US, China and India’s bleeding corporate earnings as near term FII inflows limiters regardless of having healthy valuations, as the other conviniently assert that FII selling is reluctant and volumetrically driven rather than sentimentally motivated.
Rajesh Palviya, an analyst at Axis Securities, explains the dip of FII selling in February by lesser trading days rather than decreased momentum selling. He assumes that market correction does not provide any impetus for change, and with these factors in play, FIIs continues to follow through on their recently set selling strategy.
He thinks that an oversold market may rebound, but it will not be led by FIIs. In his view, selling as a reaction to a slowing economy is quite obvious and comes hand in hand with weak corporate earnings and unhealthy valuations. He further noted, however, that the outflows that are still to be observed will be permanently based on the relocation of the cash to the US markets, where the returns are without risk and very attractive to the FIIs reallocating funds from India.
A recently issued Kotak report puts this differently – “The strong participation by foreign investors in our conference was not so much out of buying intent, rather it was out of curiosity to know more about India for possible opportunities in the future.” If considerable declines take place in the markets or their emerging markets fund inflows raises, these investors say they are ready to use the newly liberated funds.
A few were willing to admit having been for some time active underweight on India and recently with the correction there seems to be some validation. But now this will change and they expect to see longer term value coming in from a much slower response in sectors like financial services, real estate, and e-commerce/QSR.
Emerging managers had a positive outlook for inflows to emerging markets for this year due to the persistent valuation difference with US equities. However, high valuations and slowing growth have made India a less attractive option. India’s capital gains tax is also a worrying trend, especially now as return expectations are much lower than the earlier years where equities had stable INR/USD parity with positive 20 percent+ returns.
According to Deven Choksey, MD of DRChoksey FinServ, FII outflows are a result of the dollar fund requirements from, and outflows into, other emerging markets such as India. Additionally, the increase in dollar value has resulted in the rupees’ depreciation, causing more leveraged funds to exit. Nevertheless, he does affirm that most of the aggressive selling has already occurred.
Choksey continues to consider India as fundamentally strong. India should see a strong recovery led by Nifty due to its attractive valuations with one year forward PE at 18x. He also anticipates a recovery led bounce in the markets. Furthermore, Choksey asserted that weak market liquidity meant FII selling was very potent suggesting that better liquidity will help fortunes in mask the negative impact of these outflows.
Siddarth Bhamre, the Research Head at Asit C Mehta Investment Intermediates, is of the opinion that most of FII selling is already done. Although selling may continue, the intensity is bound to decrease. He assigns this to correction in US bond yields and India’s considerable underperformance on the global stage. While Bhamre remains guard, he expects incremental FII selling to slow down as valuations become more appealing. As for the timing of FII buying, Bhamre opines that the FIIs may re-enter the market once domestic investors start selling.
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