Foreign portfolio investors are expected to continue selling stocks for a while as the easy money era has come to a decisive end. With recession fears mounting and the US Federal Reserve steadily raising interest rates, experts expect the sale to continue. According to data available on Bloomberg, FPIs have so far sold Indian stocks worth $25.3 billion in CY22, up from the previous record outflow of $12.9 billion during the 2008 financial crisis.
Escalating inflation, the weakening rupee and the US Fed’s decision to aggressively raise interest rates have forced foreign fund managers to take money from risky emerging markets, including India. On Wednesday, the Fed raised its benchmark rate by 75 basis points and said it is “strongly committed” to bringing inflation down to 2%, pointing to more hikes in coming meetings.
The exodus of foreign investors from Indian markets is likely to continue amid expectations of further rate hikes by the US Federal Reserve and uncertainty over the geopolitical scenario. “The risk aversion, combined with the uncertainty surrounding the war between Russia and Ukraine and the slowdown in China, will keep pressure on all emerging markets, including India, in the near term,” said Vivek Sharma, head of international client group Edelweiss Wealth Management. FE said. He believes that flows can only reverse if inflation growth slows and markets begin to gain confidence from global central banks’ efforts to moderate the rate of inflation through monetary policy.
Selling by foreign fund managers was also driven by high valuations in Indian markets, which were even twice the valuation of some emerging markets. At its peak in October 2021, Nifty was trading at 22.77 times its annual profit. Nilesh Shah, Group Chairman and MD, Kotak Mahindra AMC, told FE: “FPIs are selling India because we trade the double valuation of emerging markets and have delivered double the returns of our peers over the past eight years. They sell because they are both profitable have books like from India.”
Since October last year, Indian markets have seen the second highest FPI outflow at $30.06 billion. Taiwan topped the list with an outflow of $30.7 billion. Financial and technology stocks, where FPIs park nearly half of their money, sold massively during the period, while basic goods companies were the most sought-after.
Going forward, even if the major central banks expect to control macro factors, experts believe the timing of inflation and interest rates will remain difficult. “Timing interest rates and inflation is not easy, either by the central banks or anyone else,” Saurabh Mukherjea, founder of Marcellus Investment Managers, told FE.
However, the long-term outlook for Indian equity inflows remains strong based on several factors, including major corporate mergers and more foreign investors signing up for India. “There are three critical triggers in terms of FPI flows. First, as investors are huge investors in both HDFC and HDFC Bank, a green signal from the RBI on the merger agreement will have a significant impact on FPI flows. There is also increased interest from first-time FPIs to India, and any regulatory development to shorten the application process from two to three months to become a registered FPI will further accelerate flows,” said Mukherjea.
In addition, given the backdrop of the slowdown in US and EU growth and the uncertain economic outlook for China, India will remain attractive to global investors. “There will be a reversal in flows when the Fed signals a pause. The markets will now focus on the weakening of macro aggregates, the Covid situation in China and the conflict in Ukraine,” said Somnath Mukherjee, managing partner of ASK Wealth Advisors.