When Will Foreign Investors Stop Selling Indian Stocks?
(A new blog post dated 28Apr2022 on FPI flows is available here)
Foreign investors, officially known as foreign portfolio investors or FPIs, have sold almost Rs 1,50,000 crore, or USD 20 billion, worth of Indian stocks in the past two quarters, that is, between October 2021 and March 2022.
Such a quantum of selling by FPIs, who own about 18 per cent of Indian stocks, should have pressurised Indian equities to a great extent. But this time, the FPI selling has no major impact on Sensex or Nifty 50 index -- which consist of large-cap stocks.
In the past two quarters, India's major stock indices Sensex and Nifty 50 barely lost one per cent of their value (Table 1 below). As India's domestic institutional investors (DIIs)--like mutual funds and insurance companies--and retail investors have more than matched the foreign selling, the major indices have remained resilient (with high volatility in between) in the period.
The selling by foreigners is heavy in stocks belonging to sectors, like, banks, financials and information technology--as they are traditionally big holders of stocks in these two sectors. As the free float of bank stocks in India is high, FPIs tend to hold more of these stocks due to the higher liquidity in these stocks.
Reasons for FPI Selling
Some possible reasons for the heavy selling by foreign investors (of course, with the benefit of hindsight) are:
- Foreign investors are highly nimble and they move from one market to another looking for better opportunities (this behaviour can be observed from the monthly data of FPI buying and selling)
- The selling by FPIs started sometime in September 2021, which coincided with the US Federal Reserve signalling its intention to raise interest rates in the US.
- Flight to safety: Rising interest rates in the US generally put pressure on stocks of emerging markets, which India is a part of (though the Fed actually raised rates only in March of this year, foreign investors started selling much before the actual event--as they say, markets usually run ahead of actual events).
- FPIs may be rebalancing their portfolios away from India and toward other emerging markets based on relative valuation of these markets. Indian stocks traditionally quote at higher valuation compared to other emerging markets, like, China, South Korea or Brazil.
- In the past two years, India's weight in MSCI Emerging Markets Index has been steadily rising--this is mainly at the cost of China's. India had a weight of 7.8 per cent versus China's 40.7 per cent at the end of March 2020.
- But at the end of February 2022, India's weight surged to 12.4 per cent whereas China's declined to 31.8 per cent, as per MSCI data.
- So, some part of the FPI selling could be attributed to their profit booking motive as FPIs hold emerging market stocks via exchange-trade funds or ETFs
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Weblinks and Investing-------------------
Table 1: FPI Equity Flows (quarterly data from Jan2019 to Mar2022) >
please click on the image for a better view >
When Will FPIs Stop Selling?
For more than six months, FPIs have been selling Indian stocks relentlessly. The question on every one's mind now is when will they stop selling. Given the global uncertainties arsing from Russian invasion of Ukraine, rising tide of inflationary expectations across the globe exacerbated by higher commodity prices and surging yields of global bonds, it's hard to predict the future course of FPI flows.
However, there is a silver lining: In the past three trading days, FPIs bought nearly Rs 6,400 crore or USD 840 million worth of Indian equities. While one can't extrapolate this recent trend to continue forever, one can expect FPIs to alternate between selling and buying, instead of the one-way street we had experienced for more than six months.
My personal view is foreign investors may turn positive on Indian stocks once their rebalancing priorities are done. In the next 10 days, corporate results season is starting. The FPI flows will be highly influenced by these results.
As a net importer of industrial commodities and crude oil, India is at the receiving end of the recent boom in commodity prices. If the Ukraine war were to come to an end, we may hope to see easing of commodity prices and supply chain bottlenecks.
The next four to six weeks will be interesting for Indian markets. Let us see how it pans out.
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P.S.: A new table was inserted in place of above table on 28Apr2022--to rectify some errors in the data of the table
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
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