A large bulk of selling by foreign institutional investors (FIIs) have been concentrated in the five big sectors of financials, oil & gas, FMCG, IT and construction so far in the first 6 months of calendar year 2024. The cumulative outflow from these 5 sectors has crossed the Rs 1 lakh crore mark, shows market data.
Till June 15, FIIs have sold financial stocks worth around Rs 53,438 crore, oil and gas stocks worth Rs 13,958 crore, FMCG stocks Rs 12,911 crore, IT Rs 13,213 crore and construction Rs 9,047 crore.
On the other hand, buying has been seen in consumer services, capital goods, telecom, services and realty sectors. The net outflow in the first 6 months, barring one fortnight, is more than Rs 26,000 crore.
The FII selling, which has been largely due to valuation concerns, has resulted in FII ownership falling to an 11-year-low of 17.68% in March, down by 51 bps quarter-on-quarter.
In the next 6 months, the three big triggers for FII flows would be the Union Budget, US Fed’s interest rate trajectory and the outcome of the US Presidential elections.
After meeting over 50 investors in a recent US roadshow, Jefferies analysts believe that FII flows into India would improve in the second half of the calendar year as clarity on Modi 3.0 policies emerge post budget.
“Our investor meetings in the US show a heightened interest to invest in India from global and international (Non-US) mandates. India’s 7%+ GDP growth path over the medium term and a large $5 trillion market cap has raised interest in Indian opportunities. A potential US Fed rate cut later in the year could be a big trigger for higher FII flows to India,” says Mahesh Nandurkar of Jefferies.
While fund managers at FIIs appear confident on the economy and earnings outlook of India Inc, the reluctance to jump into Dalal Street in a post-election rally stems from expensive valuations. A potential slowdown in domestic retail flows can create entry opportunities for FIIs.
“The discussions with EM funds suggest that their India weighting is neutral to small underweight; partly on valuations, elections related volatility and a sharp rise in India’s benchmark weight. We estimate the relative positioning of the FPIs to be close to neutral vs the traditional ~2ppt overweight,” Nandurkar said.
When it comes to sectoral choices, industrials is the favorite but there is some traction in autos and banks. Staples attract the least interest, and there is some momentum in technology names, according to analysts.
Within financials, large private sector banks could be top winners as and when FIIs start buying big. While pointing out that private sector banks are at attractive valuations and expected to report 16-18% ROE over the next couple of years, analysts at Macquarie are staying away from PSU banks, insurance, and fintechs owing to regulations, declining fundamentals, and unfavourable risk-reward.
“Despite a lower loan growth environment, we expect private sector banks to report healthy ROAs and ROEs over the next three years and remain steady power of compounding stories. We expect healthy ROEs in the 16-18% range. They are less affected by ECL regulations and carry contingent buffers (most of them) and we do not see any adverse asset quality outlook. A delayed rate cut cycle further cushions NIMs for them in the near term,” Macquarie’s Suresh Ganapathy said.
Many foreign investors are willing to look at sectors beyond the traditional banks, IT and consumption plays.
“FIIs seem more keen to invest in ‘Consumption’ driven capex themes such as residential real estate, airports, hotels, malls etc. with a good appetite to invest in the small and midcap names in this space,” according to a Jefferies report.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
