FII Sales: Waiting for the Unprecedented FII Equity Outflow to Reverse? Wait

NEW DELHI: Over the past eight months, foreign institutional investors have made the biggest sell-off in Indian equities since the global financial crisis of 2008-09, and past experience suggests that a resurgence of foreign inflows is on the cards.

Ilara Capital, a London-based financial advisory firm, believes there is a combination of factors that could prevent FII liquidity from returning to the Indian market soon.

“The risk of further FII supply may be higher,” the firm said in a note.

“In the past, Indian markets have always outperformed EMs after large sales of FIIs because they affected prices. But this time India’s outperformance has remained at a historic high. As a result, increasing foreign liquidity is being diverted to other low-performing EMs (mostly in China). ”

The global firm noted that this was the only time when the relative allocation of FIIs in the Indian market was at record highs due to buying from domestic institutional investors and retailers, despite such a large outflow of foreign investment from equities.

Foreign institutional investors have been selling Indian equity every month since October 2022 Net sales of FII stocks stood at Rs 1.9 lakh crore from October 2021 to May 2022, NSDL data show.

Global Alarm Bells

It is no secret that global factors are not conducive to the dominance of the stock market at this juncture. A host of central banks, including the world’s largest economy, have embarked on an aggressive fiscal austerity cycle, indicating tight financial conditions around the world.

The waves will be felt in India, especially from an assessment point of view, Elara Capital has warned.

According to global organizations, the fall of the Nasdaq has historically been a major indicator of global market valuation coming in a de-rating mode. The risk is higher for expensive names, whose valuation can hurt even in the face of low earnings frustration.

“Indian markets could also pull along with Nasdaq. This leg of correction from 18,200 was led by Nasdaq. Big support for Nifty at 13,000-13,500. That’s the decent thing to do, and it should end there. ”

The firm warns that since the reverse acceleration of stock prices was sharp, retracements could also be sharp.

“Only a break below 13,500 could challenge the big structural trend for India.”

The headline Nifty and Sensex indexes returned about 20 percent in the previous year, surpassing many world markets.

“After the fall of the most populous theme of the decade (US growth / technology stocks), we see liquidity expanding and moving to other markets. This will be similar to what we saw in 2000-2002, the last time US growth / technology saw a big decline, “said Elara Capital.

“This has laid the groundwork for a major liquidity shift in EM over the next few years. For Indian equities, this could be a pain stage before a big gain. ”

(Disclaimer: The recommendations, suggestions, opinions and opinions offered by the experts are their own. These do not represent the views of the Economic Times.)