Foreign investors seem to love Indian equities more than we do

Foreign institutional investors (FIIs) seem to like Indian stocks more than domestic institutional investors (DIIs), according to recent fund flows data. Since the beginning of July, FIIs have turned net buyers and have invested $1.3 billion (around Rs 7,277 crore), while DIIs have been net sellers to the tune of Rs 3,621 crore.

Saurabh Mukherjea, head of equities, institutional equities, at Ambit Capital Pvt. Ltd, says, “Foreign investors do not have too many investment choices in a weakening global growth environment. China is seeing a hard landing and the only viable domestic demand-driven story in emerging markets is India. Clearly, India is the star among all the investment destinations at a time when commodity prices are coming down.” The Thomson Reuters/Jefferies CRB Index, a global commodities benchmark, and crude oil prices have declined around 7% each, year to date.

Domestic investors, on the other hand, are seeing comparatively higher returns from bank fixed deposits, although it’s still not enough to beat inflation. Gold, too, has become a hedge against inflation.

For foreign investors, although India’s economic growth slowed considerably, it’s still doing better than many other countries in the west and emerging markets in terms of growth. Also, because of the extreme pessimism over policy paralysis and twin deficits, valuations had become more reasonable. This caused foreign banks such as UBS AG, Deutsche Bank AG and JP Morgan Chase and Co. to turn overweight on India.

Of course, the recent net foreign inflows into Indian equities have come after three consecutive months of outflows. The fund flows can also be attributed to rumblings of optimism over the change of guard at the finance ministry level and softening of the general anti-avoidance tax rules.

Normally DIIs are net sellers of Indian equities when the FIIs are net buyers. But the direction of market sentiment is highly correlated with FII flows. Historically, positive FII flows have driven the market up and vice-versa. Even year to date, FIIs have been net buyers of stocks worth $9.8 billion in Indian equities while DIIs have been net sellers worth Rs 22,374 crore and it is not surprising that Indian markets are up over 10% year to date.

But the confidence by foreign investors does mean that everything in India is hunky dory. Nick Paulson, India country head of Espirito Santo Securities India Pvt. Ltd said the flows that have come are generally technical in nature as pessimism was overdone and valuations became more compelling. But fundamentals are still fragile, foreign investors have been spooked by the fall of the rupee and are skeptical the government is suddenly going to pass and stick to a series of reforms.

Graphic by Sarvesh Sharma/Mint.

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