By Ashley Coutinho
After nine consecutive months of outflows, the net flows from foreign portfolio investors (FPIs) into Indian equities turned net positive in July.
India’s equity market, just like others around the world, seems to be benefiting from a host of bad news emanating from the US, whose GDP contracted for a second successive quarter, entering a technical recession in the process.
Market pundits are now hoping that a weak US economy would slow the pace of monetary tightening by the US Federal Reserve, and probably lead to a pause in rate hikes by October. The reading is that a recession will bring down commodity prices and inflation, obviating the need to jack up rates further.
Whenever interest rates go up in the US, the emerging markets look like a riskier bet, leading to outflows. The reverse is true as well.
“FPIs are back due to an uptick in risk-on trade amid the dollar’s fall and the expectation that interest rates will not rise as quickly at the back end of the year as originally thought. That’s why markets are rallying globally and emerging markets like India are a beneficiary,” Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies, said, adding that the markets saw a fair bit of short covering by FPIs last week.
The dollar hovered near a three-week low to major peers on Monday, with the dollar index, which measures the currency against six counterparts, ruling at 105.58, a one percentage point retreat over the last five days.
“Global markets are rebounding from very low levels of risk appetite. Rolling 12 month flows as a percentage of market capitalisation had reached levels only better than the global financial crisis. Somewhat expectedly, flows to several markets turned positive in the past week. While a sentiment switch to ‘bad news is good news’, a lag between expectation and appearance of poor economic data may mean the rebound lasts long enough to test investor patience,” Neelkanth Mishra, co-head of equity strategy, Asia Pacific and India equity strategist, Securities Research, at Credit Suisse, said in a recent note.
The holding of FPIs in companies listed on the NSE had slumped to a 10-year low for the quarter ended June. The value of their holdings slipped 12.3% to Rs 45.6 trillion. The investors had pulled out Rs 69,476 crore from the financial services and information technology sectors in Q1.
The reversal in FPI flows may not sustain in the long run, especially if inflation continues to remain high in the US, market watchers said. “There is no doubt that financial markets, in the midst of the silly season, have been in an awful hurry to price in the peaking out of inflation and the end of Fed tightening,” Christopher Wood, global head of equity strategy at Jefferies, wrote in his recent note to investors.
“While contrarian instincts would point to flows chasing the underperforming markets, given the cloudy outlook of most regions, the likelihood is of sustained flows to EMs (beyond the current rebound) remaining muted, with asset allocators tracking performance of the past five years,” Mishra added.
India’s benchmark indices rose 8.5% in July, buoyed by buying from overseas investors to the tune of $0.6 billion.
According to Credit Suisse, India’s relative valuation is expected to remain elevated, supported by its improved macro-fundamentals and relative attractiveness. However, geopolitical risks and recession fears amid aggressive tightening by major central banks are key headwinds that could lead to heightened volatility in the near term. The brokerage prefers companies with high domestic exposure in sectors such as financials, healthcare, autos and FMCG.