In keeping with the bullish stance on India, foreign investors increased their exposure to Sensex companies to an all-time high of 27% in the September quarter, says Bank of America Merrill Lynch (BofA ML) in a recent report.
This comes on the back of a 8th consecutive quarter of positive inflows from the FIIs. As of June 2014, FIIs collectively held around 22.5% of the market and around 46% of the free float. In comparison, FIIs held around 15% of total market cap and 36% of free float in March 2009, according to data from Bloomberg and the exchanges.
The brokerage says “India overweight is at an all-time high for Global Emerging Market funds and the consensus bullishness creates the biggest risk to markets, in our view. The good news, however, is that domestic mutual funds have seen inflows and have been buyers post-elections after being net sellers past few years.”
A sector-wise analysis shows that financials continue to remain the highest overweight sector for the FIIs, while software and energy are the biggest underweight sectors. On financials, the brokerage says, “Continuous buying in the sector coupled with the exclusion of most private sector banks from MSCI India due to lack of FII room has made the overweight an all-time high for the FIIs. This is likely to further rise due to the recent exclusion of HDFC Bank.” As a contrarion trade, BofA ML suggests ownership in select PSU banks such as SBI which is still significantly below the previous cyclical peaks even as most private banks are heavily owned by the FIIs.
The brokerage believes that the sharp outperformance of the IT sector over the past few quarters has largely been responsible for the rise in the underweight for the sector.
Although currently underwight on energy, they remain positive on energy sector reforms and believe positive progress on it could lead to FII buying in PSU oil companies.
Most bought sectors by FIIs were consumer, telecom, software and financials while most sold sectors included industrials, cement and metals, as of November 14.