The broader index ended December on a sombre note, losing 3.5%. Foreign Institutional Investors (FII) withdrew every single day last month barring one instance on 6th December, displaying their pessimism.
In fact, the year 2022 saw FIIs pulling out a massive Rs 2.75 lakh crore from the cash market. However, Domestic Institutional Investors (DIIs) balanced it as they stacked in a mammoth Rs. 3.07 lakh crore.
The huge withdrawal from FIIs could be attributed to a rise in the US 10-year bond yields. These bonds yielded less than 1% during the Covid-19 pandemic. As inflation soared, the Fed hiked interest rates, driving the bond yields to a 14-year high at above 4% in October 2022. But how do these US bond yields affect Indian indices?
Bonds are an alternative investment option for FIIs to lower their risk. When the Fed hikes the interest rates, the bond prices go down and the yields begin to rise. An increase in the bond yields would mean FIIs shifting their investing paradigm from equity to debt markets. When the bond yields started to rise in 2022, FIIs withdrew their money from Indian markets. In fact, 2022 witnessed higher cash outflow by FIIs from equities compared to the Global Financial Crisis of 2008.
The following chart shows the US 10-Year Bond Yields, Net Investments of FIIs and Nifty50’s movements since 2020.
Taking a closer look at the chart, we can observe that when the US 10-year bond yield began to climb from 1% to 4%, the FIIs’ net Investments in equities started to decline while Nifty50 remained volatile.
Fed’s December hike rate was already discounted by the bond yields and they remained range bound barely touching the October highs of 4%. With inflation waning, these hikes are expected to ease. In turn, the bond yields will begin to fall, making FIIs flock back to Indian Markets.
Since Calendar Year (CY) 2002, there have been only three instances where FIIs withdrew from the equity markets. In the immediate next CY, FIIs invested aggressively and Nifty50 delivered double-digit returns. 2022 marked the 4th incidence of large cash outflow by FIIs.
If history repeats itself, we might witness FII inflows with double-digit gains in 2023.
Technical Outlook
Nifty50 remained volatile this week and kept trading below its important psychological level of the 18,000 mark. On the daily chart, the index has breached its smaller degree trend line support which is placed at around 18,050 levels and post that significant selling was witnessed.
If we observe a broader time frame (weekly chart) the front-line index is trading between the 9 & 21 EMA which is placed at 18,070 & 17,826 levels. From the past three weeks, bears are making a strong attempt to drift below 17,800 levels but the 21 EMA is acting as an anchor support for the Index. As in the first week of November 2022, Nifty posted a strong breakout above 17,600 levels and registered a life high at 18,887.60 without any meaningful correction. Presently, the current selloff can be considered a throwback of the bullish pattern.
The validity of the bullish pattern stands above the 17,600 – 17,500 levels. If in case the front-line index closes below these levels, then the gate is wide open till 17,200 – 17,000 levels. On the higher end, resistance can be observed at 18,250 levels. If the Nifty50 breaks those levels, it will trigger a buy signal towards 18,500 levels or even higher.
AgenciesExpectations for the week
The week ahead will be filled with a slew of global economic data. Market participants will closely monitor the US and Chinese inflation figures. Back home, the focus will be on the quarterly results of companies. D-street will be keen to hear about future earnings growth trajectory from the management. Amid a host of important events coming up, investors are advised to remain cautious and prudent with their investing picks.
