There’s a panic alert flashing in Indian equities, this global advisory firm warns


NEW DELHI: One of the defining features of Indian equity markets over the past six months has been how well benchmark indices have managed to hold up despite the largest exodus of overseas funds witnessed since the global financial crisis of 2008.

Tech-savvy domestic players, starved of sufficient returns from other avenues, have absorbed the large-scale selling pressure from the foreign investor and picked up stocks.

There is however a storm, perhaps even a gale, brewing on the horizon, global financial advisory firm Elara Capital says.

“India flows have been deteriorating since last few months but we could finally see the momentum turning negative,” the firm said.

“In past, whenever the flow momentum has turned negative, we have seen markets witnessing a bout of panic sell-off. We saw that in Aug’11, Nov’15 and Oct’18. Will be important to monitor.”

Foreign portfolio investors embarked on a spree of equity sales starting October 2021 and since then have been net sellers of Indian stocks every single month.

While there were some signs of a trend reversal in April, a fresh hawkish tilt from the US Federal Reserve has brought about a resumption of the foreign selling pressure.

Year-to-date in 2022, FPIs have offloaded Indian stocks worth Rs 1.2 lakh crore. Over the same period, the Nifty50 and the BSE Sensex have lost 1 per cent and 2 per cent, respectively.

This is not much of a drop, considering the ferocity of the selling pressure displayed by FIIs, but the recent trends could be a source of worry, as it seems to suggest that it could be some time before overseas investors consider Indian stocks attractive again.

Domestic investors may not display the same degree of appetite for stocks at a time when spigots of easy liquidity are being tightened back home as well, while interest rates are likely to head up.

“Despite such large outflows from India, FIIs continued to sell as India’s outperformance over EMs remains at record highs (on Retail liquidity),” Elara Capital said.

Indian benchmark indices have rewarded investors handsomely over the last couple of years, with the Nifty50 and the BSE Sensex both rising close to 20 per cent in FY22.

The financial advisory firm warns that global liquidity will cease to be supportive equities for some time now as the reversals of pandemic-era ultra-loose liquidity conditions that had begun in emerging markets are now occurring in the US too.

“Large round of redemptions have finally begun from US markets over the past 2 weeks. US funds saw outflows of $34bn (38bps) in the past 2 weeks, largest since December 2021. Most redemptions were from large cap/ETF/Growth funds. Technology & Consumption took biggest outflows.”

While international investors had been lapping up stocks at every correction despite deterioration in equity performance, finally a liquidation of incremental inflows, which are sitting on losses, has begun, Elara Capital said.

“Global performance peaked-out in Nov’21 and since then equities seen inflows of $316 bn (1.8%).”

The advisory firm says after more than a decade, global money was now flowing from the “New Economy” back to the “Old Economy” – energy, utilities, commodities, capital goods and real estate funds.

According to the report, technology and consumption performance has broken down while financials remain in a mid-way zone.

A fund manager survey by Bank of America Global Research also points towards a grim picture.

“April FMS is bearish as fear of fast & furious Fed sends global growth optimism to all-time low, keeps Wall St stability risks high; though not as bearish as war-shocked March FMS, sentiment is poor – we remain in “sell-the-rally” camp.”

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



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