Mumbai: UK’s vote to leave the European Union (EU), coupled with inconsistent domestic economic data releases and expectations of a rate hike by the US Federal Reserve, saw foreign ownership in Indian equities drop to a 15-quarter low at the end of three months in June 2016.

Foreign institutional investors’ (FIIs) exposure as a percentage to total value of BSE 500 firms (439 companies that announced their shareholding) fell to 17.32% ( 15.25 trillion), the lowest since the quarter ending September 2012, according to data from Capitaline, a financial data provider of Indian companies.

To be sure, foreign ownership in 439 companies declined for the fourth consecutive quarter after touching a peak of 21.21% at the end of June 2015.

FII holding in Nifty 50 stocks declined roughly two percentage points to 23.40% in the June quarter. Foreign holding as a percentage to total value of Nifty 50 companies stood at 25.27% at the end of the March quarter and a record 25.61% at the end of the December 2015 quarter, data showed.

Market experts were surprised to see a decline in foreign ownership as FPIs have featured net buyers of Indian shares for the fifth straight year since 2012.

The declining trend in FII ownership was a reflection of global sell-off in equities due to growing anxiety over the future of Britain in the EU and fund managers’ decision to conserve cash, they said.

“I am actually bewildered to see a drop in FII ownership. Brexit may be the prime reason for the decline because foreign funds have otherwise been consistent net buyers of Indian equities in the recent past," said Andrew Holland, chief executive, Ambit Investment Advisors Pvt. Ltd.

Gautam Chhaochharia, head of India research, UBS Securities India Pvt. Ltd, also said that foreign funds have been net buyers of Indian equities and the trend distorts the ground reality.

“Mid-and small-cap stocks have performed well recently. However, the trend is a reflection of the stocks that have rallied multiple times but are not held in large proportion by the foreign investors vis-à-vis shares that have not rallied much but held in large quantum. Another way to look at is domestic institutions have been net buyers of equities and that may have changed the proportion of shareholding across investor categories. It’s more arithmetic because foreign funds continue to be net buyers and ‘overweight’ on India," Chhaochharia said.

FIIs have pumped in dollars in Indian equities every month since March 2016, albeit at a slower pace. FII inflows were $771.23 million in June, while in April and May, inflows were $584.81 million and $385.69 million, respectively.

In March 2016, FIIs invested a little over $4 billion, data showed.

Credit Suisse (India) Pvt. Ltd analysts led by Neelkanth Mishra observed that more than half of FII ownership of India stocks is not India-dedicated.

“Global risk aversion therefore impacts India as well. Strong global linkage was the root cause of index EPS downgrades seen earlier. These risks had abated in 1H 2016 but are back on the horizon," said Mishra, managing director and India equity strategist in an investor note, post the Brexit vote.

A separate survey of global fund managers by American investment banking firm Bank of America Merrill Lynch saw global investors holding a “mountain of cash" to insulate from global economic and political developments for the last two-three months.

Average cash levels (as a percentage of portfolio value) surged to 5.7% in June 2016, the highest reading since November 2001. It stood at 5.5% in May 2016 and 5.4% in the prior month.

“…Investors continue to hold elevated cash levels to protect against potential shocks from Brexit, China and quantitative failure," observed Michael Hartnett, managing director and chief investment strategist at BofA Merrill Lynch Global Research, in a May 2016 survey.

The UK’s EU membership referendum was held on 23 June. Close to 52% of the voters demanded UK to leave the EU. The referendum turnout was 71.8%, with more than 30 million people voting, according to British public service broadcasting company BBC.

In contrast to declining FPI ownership in Indian equities, the share of domestic institutional investors (DIIs) investment has surged to a record high of 10% ( 8.81 trillion). The rise is largely an indication of the rising interest of retail investors toward equity in the recent past, data showed.

Benchmark Nifty 50 index rose more than 7% in the June quarter. The index has risen 23.6% since the quarter ending March 2014 and 80% since the low of December 2011.

On Thursday, the gauge of top 50 companies by market capitalisation closed at 8,666.30, up 0.6% from its close on Wednesday. The index is up 4.6% so far in July, Bloomberg data showed.

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