Concerns over near-term risks including tightening monetary conditions, a slowing economic outlook, likely earnings cut for the Nifty and headwinds from higher crude oil prices will likely keep them away
A characteristic of the ongoing market correction has been heavy selling by foreign investors. Since October last year, they have withdrawn about net Rs 2.08 lakh crore equities, as per NSDL data. Not surprisingly, indices are trading lower by about 18 percent from their highs.
Apparently the nine month long winter is likely to get even longer now. Commentaries from foreign money managers and expectations from domestic analysts suggest that it will take a lot of factors to culminate for them to come back.
A couple of major reasons why foreign investors have been bearish on Indian markets are rising US dollar which has also led to more yields on bonds, and monetary tightening that is likely to have a negative impact on the economy.
Concerns over near-term risks including tightening monetary conditions, a slowing economic outlook, likely earnings cut for the Nifty and headwinds from higher crude oil prices will likely keep them away, say analysts.
BofA Securities also sees Nifty testing 14,000 levels. As of now the index hovers around 15,500. Christopher Wood, Head of Global Equities at Jefferies, has said he will raise India’s weightage in his portfolio only if Nifty falls to 14000-14500 level.
So, it is obvious that the near-term outlook of foreign investors remains bearish, which means the Indian market will remain under pressure for now, even though domestic inflows continue. Though, at this point a recent statement from value investor Vijay Kedia assumes importance who said that the real game of the stock market will begin when both FIIs and DIIs will turn net buyers. So, when will that be? There is no clear answer, except, not anytime soon.
“The weak business cycle due to higher inflation and slump in demand may continue for the next 15-18 months. So unless any India-specific trigger or any dramatic change in the economy, FII selling pressure is expected to sustain,” said Vinit Bolinjkar, Head of Research, Ventura Securities.
Vinod Nair, Head of Research at Geojit Financial Services, said FII selling in emerging markets will stop when the hawkish policy of central banks is fully factored in the market. And, that will take time.
A big resolution to the inflation risk will be if global inflation starts to revert following the halt of war in Europe and re-opening of the Chinese economy by revamping supply constraints.
Akhilesh Jat, Category Manager – Equity Research, CapitalVia Global Research also agreed that the US Fed is likely to continue hiking rates aggressively, and FII selling in the Indian market may continue.
Rate hikes lead to a spike in bond yields, which drives away money from emerging markets like India into the US bonds.
The biggest casualties of foreign investor selling has been IT and banking stocks, i.e., where they hold the biggest stake. Nifty IT index is down 20 per cent year to date and Nifty Bank has fallen 10 per cent.
Analysts do not see any quick recovery in IT stocks, given their heightened valuations. On banking stocks though most analysts are bullish, and are overweight in their portfolio.