The media headlines are implying that the foreign investors have been incessantly dumping Indian equities; and this could be one of the primary reasons for currently ongoing correction in the equity prices.
Though there is no evidence of any strong
correlation between Nifty and foreign flows over medium to long term (3 months and
beyond); these flows have been seen increasing the volatility in near term.
In particular, if the correction in prices is
sharper, the selling by foreign investors is highlighted prominently, adding to
the nervousness of the non-institutional investors. It is therefore important
to know the actual trend of foreign flows; and analyze whether the selling is
part of any structural change in their view or just a trading tactics to
enhance their return.
The market participants, who track the daily
foreign flows closely and get influenced by the provisional net flow data
released by SEBI every evening, must note that—
·
“Foreign portfolio investors”
(FPIs or FIIs) is not a uniform class of investors. This includes a variety of
overseas investing entities with divergent investment objective, horizon, and
strategies. These include, pension funds having a very long term horizon; hedge
funds and alternative investment funds with short term investment horizon;
dedicated India funds which raise money from individual investors for investing
in India only; emerging market funds which invest in all emerging markets
including India; ETFs which track benchmarks like MSCI Emerging Market Index;
MSCI India Index; iShare Asia ETF; iShare EM Dividend ETF etc.
All these overseas investing entities usually
do not act in unison and mostly have different approaches to investment. Their
universe of stocks to invest could also be different.
·
The provisional data of FPI net
flows, released everyday evening by SEBI does not represent the actual net FPI
flows into India. This is just provisional data of net flows into secondary
markets as reported by the custodians to SEBI. The real net flows include
investment in primary market and debt securities also.
·
Many FPIs just run an arbitrage
or long short book. They take self-cancelling positions in equities of various
regions (e.g., Europe vs Asia), categories (e.g., emerging vs developed),
countries (e.g., ndia vs Indonesia) or segments (e.g., cash vs derivative) to
take advantage of short term trading opportunities. Their positioning usually
does not reflect their fundamental view on a country, region, or category.
·
Forex rates could be an
important consideration in many FPIs’ investing strategy. Thus, many a times
net foreign flows could be influenced by FPIs view on INR exchange rate rather
than the equity valuations.
·
Selling by FPIs does not
necessarily mean outflow from the country. Many times, it is just an asset
allocation call between equity and debt; a short term tactical trade; or sale
in secondary market to buy in primary market.
An analysis of the trend in FPIs flows for past
10years, and in particular, since the first lockdown (March 2020) due to
Covid-19 pandemic, highlights that FPIs have remained consistently positive on
India. Despite multiple downgrades of Indian equities by global brokerages like
Morgan Stanley, CLSA, Credit Suisse, Goldman Sachs etc., no significant selling
has been seen so far. Though, on relative basis the flows to India as compared
to other emerging markets might have slowed in past few months.
It is pertinent to note that the sovereign
rating upgrade by the global rating agency Moody’s a few months earlier also
did not have any noticeable impact on the foreign flows into Indian securities
– equity or debt.
In fact, the domestic institutions have
invested significantly lower amount in Indian equities in past 10yrs as well as
during the period since March 2020, as compared to the net flows of foreign
investors.
The following are the key data relating to the
foreign and domestic flows:
FPIs’ risk reward is different from Indian
investors
In past one decade, Nifty 50 has yielded a return of 215% in INR terms. However, USD denominated Nifty 50 has returned less than half (~106%). The USDINR exchange rate has deteriorated from Rs53/USD in December 2011 to Rs75/USD presently. The yearly average exchange rate of USDINR in past 10years has been Rs66.7/USD. The risk reward of overseas (USD) investors there is very different from Indian (INR) investors. They have to manage the currency risk, in addition to the market and business risks of Indian equities.
FPIs investment in Indian equities consistently more than DIIs
In past 10years, the net investment of overseas investing entities has been mostly higher than the investment made by domestic institutions. Even during the Covid period (since March 2020) FPIs have invested more than the domestic institutions.
In past 10yrs, FPIs have invested a net amount of Rs7.15trn in Indian equities, as compared to Rs2.07trn investment made by domestic institutions. Since March 2020, FPIs have invested a net amount of Rs2.08trn in Indian equities, as compared to Rs26.6bn net investment by domestic institutions.
40% of FPI equity investments are in primary market
Over past 10years, FPIs have net invested Rs7.15trn in Indian equities. Out of this, Rs2.92trn has been invested in primary market and the balance Rs4.23trn in secondary market. On net basis, FPIs’ flow have been negative only once in 2018. However, if we consider secondary market alone, FPIs have been net sellers in 3 out of past 10 years, i.e. 2015, 2018 and 2021.
FPIs sold Indian debt in 2021 despite rating upgrade
FPIs have invested Rs1.69trn in Indian debt
securities in past 10years. Since March 2020, they have net sold Rs921bn worth
of Indian debt.
The lower FPI investment in debt, despite high yield differential with developed markets, could be a matter of concern. Lower rating and lower FPIs quota in government securities could have been couple of many reasons for the low interest in Indian debt. However, even a rating upgrade few months ago and materially increase in quota during past few years has not resulted in flows into Indian debt securities.
Interestingly, FPIs have been net sellers of Indian debt in 5 out past 10 years.
FPI flows and Nifty poorly correlated
As mentioned above, FPI net investment is significantly larger than the domestic institutions’ net investment in Indian equities. However, there is little evidence to indicate that FPI flows materially influence the market direction over a longer period. Even on monthly basis the correlation between FPI flows and volatility is poor.
+
Conclusion
FPIs are not a uniform class of investors.
However, collectively they have been positive on Indian equities for long.
There is no evidence to indicate that they are dumping Indian equities or
causing unusual volatility in Indian markets. The headlines like “Foreign
Investors dumping Indian Equities” therefore are best ignored. As per Prime
Database, FPIs are presently invested in 1370 listed companies in India, an
all-time high number. It would therefore not correct to say that FPIs invest in
only a specific set of stocks; or only large cap stocks etc. Also, presently
FPIs hold ~21% of all NSE market cap as compared to ~7.3% for all mutual funds
in India. Thus after promoters (~51%), FPIs collectively own the largest share
in listed Indian companies.
