Markets
FPIs double down on bearish bets ahead of Trump 2.0
Summary
- The last time FPI shorts on index derivatives were as high was on the eve of the Lok Sabha election results. This time, investors are bracing for unpredictable policies from the Donald Trump presidency.
The change of guard in America looms large over India's stock market, with foreign portfolio investors (FPI) raising bearish bets close to record levels a day ahead of Donald Trump's inauguration as the 47th President. Market experts warned that Indian equities could be buffeted by the unpredictable nature of the incoming US president's policies, in addition to tepid earnings and economic growth back home.
Besides net selling ₹44,396 crore worth of shares in the month through 16 January, FPIs have raised cumulative bearish bets on Nifty and Bank Nifty futures to 326,838 contracts as of Friday, with 49,028 contracts being added last week alone. These are FPIs' highest bearish positions since 4 June when they were cumulatively short 355,379 contracts amid the Lok Sabha election results, according to analytics firm IndiaCharts.
Bearish bets
"The market today remains uncertain about Trump, quarterly earnings and economic growth, which, though improving, is subdued," said Nilesh Shah, managing director of Kotak Mahindra AMC. Shah explained that FPIs have used India as a "revolving door" since 2021 , buying at times and selling at others, and are currently underweight India on a valuation basis.
Indeed, India, which had overtaken Taiwan to the second spot by weighting on the MSCI Emerging Markets Index (EM) early last year, slipped below the tiny island nation after the recent market correction. As of December-end, India's weighting on the index, used by global money managers to allocate funds to EMs, stood at 19.43%, behind Taiwan (19.72%) and China (27.79%).
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Nirmal Jain, founder, IIFL Group, said that while markets have discounted Trump's policies on tariffs and immigration before and after the US election results in November, FPIs have taken an "abundantly cautious" stance ahead of the inauguration. He cited executive orders of around 100 that Trump was likely to sign post his inauguration on Monday as among the reasons that could add to their uncertainty on EMs.
"The market has discounted Trumpian policies based on known views post the US election results, but we will have to wait and see how policies related to tax cuts, tariffs and immigration unravel post his inauguration. That's the reason FPIs are selling off EMs in favour of US assets," Jain said.
Rohit Srivastava, founder of IndiaCharts, believes the Nifty could break the 23,000 level in a "knee-jerk reaction" this week on concerns of "greater hawkishness" by Trump.
"While markets have priced in some impact of high tariffs and anti-immigration measures by the Trump administration, the signing of 100 executive orders on Day 1 sounds ominous. It's little wonder then that FPIs are ultra-cautious on emerging markets like India. I believe we could break below 23,000 before some clarity on further market direction emerges," said Srivastava.
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The highest bearish position of 392,756 index contracts by FPIs was on 22 March, 2023 amid market weakness, according to IndiaCharts.
Economic growth and earnings pressures
While the Nifty slumped by 8.5% to a low of 21,281.45 on 4 June after the Bharatya Janata Party failed to secure a majority on its own, the index rallied 23.5% thereafter to a record high of 26277.35 on 27 September, on hopes of political continuity supported by a strong coalition and promise of world-beating economic growth.
Since then, the Nifty has fallen 11.7% to 23203.20 on Friday, following fears of the impact of a Trump administration on FPI flows and concerns around economic growth. At its policy meeting last month, the Reserve Bank of India (RBI) slashed India's growth forecast for the current fiscal to 6.6% from 7.2% earlier amid a slowdown in consumption and government spending.
FPIs have net sold shares worth ₹2 trillion in the cash market since October, data from National Securities Depository Ltd showed. While DIIs have net purchased ₹2.34 trillion worth of shares, markets have corrected as they are bidding at lower levels, Kotak's Shah said.
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Ashish Gupta, chief investment officer at Axis AMC, believes that EMs like India could face an extended FPI selloff if the impact of Trump's policies were seen as raising the US fiscal deficit and increasing global inflation levels.
Earnings expectations remain subdued, he believes, with some large companies beating “muted" Q3 expectations and large banks posting “mixed" results.
