The Indian share market outperformed most other markets last year, benefitting from better management of macros including inflation, and corporate earnings that did not disappoint despite challenging times. India got a larger than proportionate share of FPI funds directed towards emerging markets. Benchmark indices BSE Sensex and NSE Nifty 50 managed to end more than 3% higher, even though Indian equities saw the worst sell-off ever from foreign institutional investors (FIIs) in 2022. FIIs sold Indian stocks worth Rs 2.78 lakh crore in 2022. Meanwhile, DIIs remained net buyers last year, purchasing equities worth Rs 2.76 lakh crore. The strong DII buying was buoyed by continued inflows in MFs, even as the pace of monthly inflows slowed.
This is the first time in four years that FII flows have turned negative. Since the beginning of the year 2022, FIIs continuously remained net sellers, according to NSDL data. The trend saw a reversal in July and August, but they reverted to being net sellers in September, October, and December. Despite the rout, FPI flows towards India and other EMs continued to be relatively stable even after the hawkish stance which indicates market expectations of peak interest rates in CY23.
FII Activity in 2022
DII Activity in 2022
“Concerns over Covid in China are negative, and the strong economic data from the US indicates continuation of the Fed’s hawkish stance, which is pushing bond yields up and equities down. In the first half of December, FPIs were buyers in auto, capital goods, FMCG, and real estate stocks. They were sellers in consumer durables, oil & gas, power, and financials. Macro data from the US and Covid news will drive FPI flows in the near term,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.
Indian markets’ outperformance to take a breather in H1CY23
According to experts, emerging markets are likely to benefit from a relatively more benign world vs 2022. However, India’s trailing outperformance may take a breather in H1CY23, given relative valuations. India is still expected to have better growth than most parts of EM due to a relatively strong macro environment. BofA Securities said that since the peak in October 2021, FIIs have largely been net sellers. FII ownership of Indian equities is at a multi-year low of 18% compared to 23% in 2019, it added. According to the brokerage firm, the bear target for the Nifty 50 for 2023 is 17,000 because valuations are hefty and earnings downgrades are likely. However, FII inflows could drive the Nifty to hit the bull target of 20,000.
A protracted recession in the US could mean FII outflows could continue this year as well, according to BofA Securities. However, conservative estimates suggest that provident fund, pension fund, insurance funds, and SIPs could contribute at least $20 billion (Rs 1.65 lakh crore) into Indian equities in 2023. This outlook holds some merit as according to Association of Mutual Funds in India (AMFI) data, the SIP inflow for November was Rs 13,306 crore, a record high, with the total SIP AUM at Rs 6.83 lakh crore.
FII inflow to remain volatile, DIIs to lend support to Indian markets
BofA outlook suggests that India doesn’t compete with China for the allocation of EM funds; they are directionally linked. A reopening in China could lead to higher EM allocation by FIIs, which will benefit India. “Valuations are at a 10% premium to their long-term average, which is why FII inflows could stay volatile. A slowdown in the US and global economy, the Fed pivot, a strengthening yuan, higher crude ($100 avg), China reopening along with geo-political uncertainties driven by Russia-Ukraine and China-Taiwan, are the key events the year ahead,” said Amish Shah, MD and head (India research), BoFA Securities.
While FII flows are seen remaining volatile, at least till in the first half of 2023, domestic flows are expected to lend support to the markets. However, the rising deposit rates could be a risk, and the DII support could lose momentum. Goldman Sachs in a report suggested FII inflows could remain weak to start 2023, as equity leadership could shift towards China/ North Asia (in case China reopens faster than expected), but could pick up later in the year as domestic growth recovers in H2CY22, dollar likely reverses, and the global macro environment improves, thus giving a boost to broad risk-taking.