Foreign institutional investors have sold almost $27 billion worth of Indian equities over the past six months, but have recently bought back $6.4 billion worth.
In search of stronger returns and amid hopes that major central banks will delay their rising cycles as price pressures subside, foreign investors are buying back into Indian stocks after selling them off in the first half. Fears of a recession have raised expectations that central banks may curtail or possibly stop raising interest rates to prevent a slowdown. In the minutes of their July meeting, which were published last week, U.S. Fed policymakers said they would take a less aggressive position if inflation started to decline.
Data from stock exchanges show that foreigners have sold almost $27 billion worth of Indian stocks over the past six months, but have invested $6.4 billion since the beginning of July.
Over $30 billion worth of stocks were purchased by domestic investors in the first half, supporting the market. However, foreign investors have taken the lead this month, injecting almost $5 billion on the belief that Indian businesses will post greater profitability and that a decline in crude oil prices will help the nation’s current account deficit reduce.
Analysts predict that after falling more than 6.7% versus the dollar this year, the rupee will find some relief as foreign capital returns to the Indian equity and bond markets.
Since mid-June, India’s primary stock index has increased 11.5%, compared to gains of 6% and 2.8%, respectively, for the MSCI World and MSCI Emerging Markets indices.
According to Neha Pathak, investment strategist for India Equities at BNP Paribas Asset Management, “Foreigners definitely miscalculated how India would face the pandemic and the economic rebound post-pandemic has been resilient in an uncertain global climate.”
“Any global investor will find it difficult to overlook Indian equities due to their well-developed and powerful equity markets, which have produced outstanding profits.”
Several businesses have expressed confidence that a decline in commodity prices will increase their margins in subsequent quarters despite a lackluster financial performance in the June quarter.
Leading corporations like Hindustan Unilever and Tata Motors have recently warned that the improvement of margins in upcoming quarters will be aided by declining commodity prices from previously heated levels.
Aishvarya Dadheech, fund manager at Ambit Asset Management, said that a solid earnings trend and decreasing inflation would support Indian shares.
“In comparison to other emerging markets, the rate of earnings growth will be much higher. Therefore, the drastic reductions in FII (foreign institutional investors) ownership will start to increase.”
Refinitiv data predicts that India’s large and mid-cap companies’ net earnings would increase by 18.9% in 2023, the highest increase in Asia.
Some foreign fund managers are also moving capital out from China, where stock prices have been hurt by a slowdown in the economy, new COVID-19 flare-ups, and a crisis in the real estate market.
According to a BofA Global Research research, China’s allocation to emerging market funds decreased to 36.2% from 39.4% in July while India’s allocation rose to 19.7% from 18.1% in June.
According to HSBC research analyst Amit Sachdeva, with China and the rest of the world facing economic issues, India stands out due to its higher earnings and GDP projections.
The rupee has recently outperformed several of its rival developing market currencies. The rupee has fallen just 0.03% over the past month, while the Chinese yuan, South African rand, and Malaysian ringgit have all fallen by 1.43%, 0.92%, and 0.74%, respectively.
As demand from industrialized countries slows, Morgan Stanley anticipates that Asian economies that are more focused on internal demand, like India and Indonesia, would be more resilient than those that are more export-reliant.
India, Indonesia, and the Philippines are “ideally positioned to produce domestic demand alpha,” according to the brokerage, therefore we continue to be positive on them.
DOMESTIC INVESTMENTS DROP
In August, domestic investors in India reduced their holdings as a result of an increase in bank deposit rates, which offered them risk-free money.
According to the data, domestic investors have already dumped $773 million worth of Indian stocks this month.
Slowing domestic investment, according to some economists, might only be a temporary blip. The systematic investment plans (SIPs), in which investors contribute money each month, continue to be a strong vehicle for domestic investments, according to a BofA analysis. Nearly the last ten months, monthly inflows have increased to over $1.5 billion each time.
“Perhaps some domestic investors are cutting back (positions). This year, they have purchased at all price points “said Dadheech of Ambit Asset Management.
“Since they won’t sell like crazy, their selling won’t have a negative effect on the market.”
