Primary market emerges as FIIs’ favourite amid high valuations in secondary market; ₹12,367 crore injected in August

An interesting trend is emerging in the Indian markets as foreign institutional investors (FIIs), who typically favour investing in listed stocks, are now increasingly directing their funds into the Indian primary market.

Recent data from National Securities Depository Limited (NSDL) shows that FIIs have been net buyers of ₹12,367 crore in the primary market so far in August. In contrast, they have been net sellers in the secondary market, with sales totalling ₹28,671 crore. This shift indicates a growing preference among FIIs for investing in IPOs.

Valuation divide

Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, explains that the trend is due to valuation differences. FIIs are selling stocks in the secondary market, where valuations are high, and buying in the primary market, where valuations are lower.

He also notes that the Fed's Jackson Hole speech indicates a likely pivot, with a rate-cutting cycle beginning in September, which could bolster global stock markets. In the first half of August, FIIs were significant sellers in financials in India and also sold off shares in sectors like metals due to concerns about an economic slowdown in the US and China affecting metal prices. Conversely, FIIs were buyers in the telecom and healthcare sectors, where growth and earnings prospects remain strong, he stated.

Vipul Bhowar, Director of Listed Investments at Waterfield Advisors, explains that FIIs are selling banking shares due to concerns over slow deposit growth. He notes that banks face challenges in Q1 FY25 with shrinking margins, deteriorating asset quality, and rising provisions, particularly in credit cards, personal loans, and agriculture portfolios.

Additionally, he points out that FIIs have been net sellers in metals and mining stocks since the Supreme Court allowed states to levy taxes and royalties on minerals, increasing operating costs for miners. He also mentions that the strong performance of auto stocks in recent quarters has led to some profit booking or rebalancing.

The pharmaceutical sector is bullish due to better-than-expected earnings and a strategic shift towards complex drugs. The FMCG sector is also attracting investors, driven by a significant recovery in rural consumption, supported by favourable monsoon forecasts and government welfare measures for rural economies, which both should sustain, he further added.

In its latest report, Kotak Institutional Equities said that the Indian market currently provides limited value across various sectors and stocks. The firm identified several factors contributing to high valuations, including optimistic sentiment among non-institutional investors who are less sensitive to price, a robust macroeconomic environment, and a positive earnings outlook.

Debt market sees steady inflows

FIIs have also been steadily investing in the Indian debt market. So far this month, they have infused ₹11,366 crore in the Indian debt market, pushing the net inflow tally in the debt segment to over ₹1 lakh crore.

This inflow came following a net investment of ₹22,363 crore into the Indian debt market in July, ₹14,955 crore in June, and ₹8,760 crore in May, according to data with the depositories.

The robust interest from foreign investors in Indian debt is largely due to India's addition to JP Morgan's Emerging Market government bond indices in June.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.