Shares of financial services and information technology companies continued to see the worst of heavy selling from foreign portfolio investors (FPIs) in the first half of May. Mixed earnings performance and high valuations of domestic equities are some factors that likely triggered these outflows, experts said.
In fact, the selling intensity of FPIs increased during the first fortnight of May compared to the previous month. Overall, FPIs net sold shares worth Rs 25,280 crores in India between May 1-May 15, as against Rs 14,079 crores between Apr 16-Apr 30, as per the data from NSDL.
Apart from domestic factors, FPIs have also been rotating funds out of Indian market to China, purely due to the valuation differential.
The financial services sector saw net outflows of Rs 9,687 crores, and the IT sector saw Rs 5,574 crores worth of outflows. Effectively, these two sectors made up 60% of the FPI outflows seen during the 15-day period.
“Firstly, the results were mixed. We did not see any big earnings surprises from financial services companies. Second, FPIs have been sellers in India. Until FPI flows reverse, the trend in financials is unlikely to change,” said Sriram Velayudhan, Senior Vice President at IIFL Securities.
As for the IT sector, earnings have been weak due to higher interest rates in the US and Europe. Vinit Bolinjkar, head of research at Ventura Securities believes IT sector will continue to underperform market, while banking stocks may gain momentum post elections.
The US Federal Reserve’s rate cut prospects and the US elections will also play key role in the fund flows during the rest of the year. Invesco Mutual Fund said these factors, coupled with policy formulation by the new government and progress of monsoons, can induce higher volatility in the markets in the coming months.
Apart from financial services and IT, FPIs were net sellers in fast-moving energy, consumer goods, construction materials and automobile sectors. The Reserve Bank of India’s draft norms on project financing also triggered outflows in some of these sectors, including in public sector banks, market participants said.
Going ahead, Velayudhan is positive on sectors that can benefit from revival of rural demand like FMCG and two-wheeler companies. “I can see rebound in some FMCG names. After a big spell of correction, some reversal can be seen in many names. Post elections, likelihood of reform initiatives in the budget to push rural growth and monsoon can keep the street interested in FMCG,” he said.
Meanwhile, bucking the trend of FPI outflows, consumer services sector saw net inflows of Rs 733 crores in the first half of May, and capital goods saw net inflows of Rs 376 crores.