Foreign investors have been selling domestic stocks for months, taking money out of stocks before central banks raise interest rates.

Foreign investors have been selling domestic stocks for months, taking money out of stocks before central banks raise interest rates. The heavy outflow of money from Foreign Portfolio Investors (FPI) in the past year has surpassed that seen during the 2008 global financial crisis, analysts at ICICI Securities said in a note. “The ongoing FPI sale of Indian stocks appears to be the highest sell-off since the global financial crisis (GFC) of 2008 with cumulative TTM FPI sales of $36 billion versus $28 billion during the GFC,” she added. However, benchmark indices have fallen by about 10%, compared to more than 50% in 2008.

Indian equity inflows were robust in 2020 and most of 2021 due to FPIs. Dalal Street recovered during this phase and outperformed emerging markets. However, recent headwinds such as global inflation, projected rate hikes and now the war between Russia and Ukraine have forced FPIs to become net sellers.

Dip in the possession of foreign investors

Analysts at ICICI Securities studied FPI sales and said fund outflows appear to be lower in the mid-cap and small-cap universe. In 2020 and 2021, small caps and midcaps outperformed benchmarks.

FPI holdings fall in Nifty indices (shareholdings by listed companies as of December 2021)

*Nifty 50: Decreased by 118 fps to 23.5%
*Nifty Next 50: Drop from 74 fps to 16.8%
* Handy mid-cap: 55 bps down to 15.4%
*Nifty Small Cap: 29 bps down to 10.7%

Low impact on indices

Sales by foreign investors have only worsened in recent months, but the impact on indices has not been catastrophic. “The impact on benchmark indices (Nifty 50, Nifty Midcap, Nifty Smallcap) is much lower (15-20% absorption) compared to GFC and other instances of high-risk environments in 2013, 2016, 2018, etc, leading to FPI outflows,” said ICICI Direct.

Earlier during periods of heavy FPI outflows, mid-caps and small-caps underperformed, ICICI Securities said. This could be supported in part by strong domestic fund inflows. “TTM’s net institutional outflow is $8.2 billion (FPI + DII flows), supported by significant DII inflows of $27.9 billion, and has not yet reached the peak GFC outflow of $8.6 billion,” according to ICICI Securities. “Such aggressive buying behavior by domestic investors during falling stock prices should lead to better long-term returns for their portfolios…” analysts said. Domestic investment fund accounts have tripled from 40 million in December 2014 to 126 million in February 2022.

FPIs Abandon Banks, Financial Institutions

ICICI Securities said that sector-wise, the bulk of FPI sales in the past 12 months have been concentrated around IT, banks, NBFCs and industrials. Data showed that foreign investor flows are negative $363.8 billion for banks and negative $483 billion for the IT sector. The retail industry is one of the few that has witnessed an influx.

This post Foreign investors flee India and sell more shares than 2008 financial crisis

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