Mumbai: Foreign institutional investors (FIIs), the biggest drivers of India’s equities market, have pared their shareholding in most stocks over the March quarter. Net outflows of $657.41 million (Rs2,912 crore today) during the period over a string of concerns relating to the Indian economy and polity saw foreign ownership drop from the December peak.
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Despite the fact that such concerns still remain, analysts and fund managers do not expect FII holdings to move down significantly from the current levels as some of the negatives have been factored in and, even with a moderation in economic growth, India would still be one of the fastest growing economies in fiscal 2012.
A rising preference for emerging markets, evident in the past few weeks, will benefit India, analysts say. Among 33 Nifty firms that have so far disclosed their shareholding pattern for the quarter ended 31 March, 24 saw a fall in the FII component. Aggregate foreign ownership for 31 of this set of firms for which data were available for the past 24 quarters, fell over 2% to 15.16%.
Nifty consists of the 50 most liquid stocks traded on the National Stock Exchange.
Domestic institutions and retail participants also pared their holdings, with promoters picking up stakes in most companies.
Listed Indian firms furnish data on their shareholding pattern to the stock exchanges at the end of every quarter. So far, 332 firms of the 500 top companies listed on the Bombay Stock Exchange have declared their shareholding for the March quarter. A Mint analysis shows that FIIs have pared their stakes in 128 companies.
The BSE-500 index represents 93% of the total market capitalization of the exchange.
Aggregate foreign ownership in 248 out of this set of firms, for whom past 24 quarter data were available, saw the sharpest decline in 11 quarters, falling nearly one percentage point to 12.7% in March.
In the March quarter, FIIs sold stakes across sectors. Banking and automobile stocks, where foreign investors were the most overweight, saw the sharpest cuts while software companies, especially the smaller ones, saw increased buying by foreign investors.
Among Nifty stocks, Siemens Ltd and Kotak Mahindra Bank Ltd saw the greatest rise in foreign ownership. Siemens saw a 1.7 percentage point rise to 6.3% while Kotak Mahindra witnessed a 1.4 percentage point rise to 25.4%.
Auto makers Mahindra and Mahindra Ltd and Maruti Suzuki India Ltd saw the sharpest drop in foreign holdings with FII stakes falling by at least 1.5 percentage point in each.
“There has been a significant sell-off in mid-caps as they are expected to face the brunt of rising interest costs and enjoy limited pricing power,” said Toral Munshi, head of the Indian arm of wealth management unit at Credit Suisse Group AG.
“I would expect some sectoral rotation with underperforming sectors in which foreign investors pared stocks sharply to see rising interest in the coming months,” Munshi added.
Foreign investors had pumped in a record $29 billion in Indian markets in 2010, attracted by the resilience of the Indian economy, which grew at the fastest pace of 10.4% among major economies of the world in 2010, according to International Monetary Fund estimates.
Since then, macro concerns have spooked investors and brought down Indian markets by over 5%, placing it among the worst performing this year. In recent weeks though, the tide seems to be turning with inflows to emerging markets including India picking up.
India has seen net foreign inflows of $1.2 billion this year so far, higher than any other equity market in Asia excluding Japan, according to Bloomberg data. The 30-share Sensex has moved up 8.9% over the past month, performing in line with the MSCI emerging markets index.
“There is a lack of investible opportunities that offer the kind of growth that India offers,” said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership LLP, a global fund registered as an FII in India. “With lingering concerns on the peripheral economies in Europe, any rise in risk appetite for emerging markets would favour India, despite headwinds such as inflation and corruption.”
Expectations of a weakening dollar and an appreciation in Asian currencies, including the rupee, have encouraged foreign investors, Munshi said.
“The recent market rise has been similar to the rally in September when a surge of foreign liquidity drove up markets despite valuation concerns,” said Munshi. “There is no valuation concern now but there are macro-economic concerns still.”
Economists at Goldman Sachs Group Inc. and Nomura Financial Advisory Securities (India) Pvt. Ltd raised their inflation and interest rate hike targets on Thursday. Tushar Poddar of Goldman Sachs raised his inflation forecast for fiscal 2012 to 7.5% from 6.7% and lowered his economic growth target to 7.8% from 8.7%, anticipating a further 1.25 Percentage points hike in policy rates in 2011 to combat inflation. The Indian central bank has raised its policy rates eight times since March 2010. The policy rate is now pegged at 6.75%, lower than the average inflation of 9.4% in fiscal 2011.
Markets across Asia have become increasingly dependent on a narrow stream of liquidity from foreign funds, which exposes them to a swing in sentiment, said Sean Darby, Asian strategist at Japanese investment bank Nomura International, in a 20 April note to clients.
“The market may be due a period of reassessment before the uptrend can continue,” Darby wrote.