Foreign institutional investors (FIIs), the prime drivers of the equity market, are increasingly reducing their exposure in India. Analysis by two global entities, in less than two weeks, has shown that overseas investors are bearish on India and are selling shares to exit the market.
After five consecutive quarters of net inflows, India-focussed offshore funds and exchange-traded funds (ETFs) recorded a net outflow of $2.2 billion in the quarter ended September 2015, according to a report by the U.S.-based investment research firm Morningstar. This was the highest quarterly net outflows that the category has witnessed after the third quarter of 2011, when it registered a net outflow of $2.5 billion.
“Net outflows from India-focussed offshore funds and ETFs (during the quarter ended September 2015) marked the reversal in the trend, which arose after the general elections in May 2014 resulted in the formation of a stable government. The post-election euphoria, coupled with signs of improving macro-economic conditions, boosted investor sentiments and resulted in FIIs pumping money into Indian equities,” according to the report.
However, it adds that that the trend in the September quarter is an isolated one as the turmoil in the global markets made foreign investors vary of emerging markets, prompting them to pull out their investments from the markets considered risky.
The report comes close on the heels of another global major, Bank of America Merrill Lynch. According to the firm, for the first time since October 2014, India has fallen out of favour among emerging market and Asian fund managers with its rating falling to neutral from being the most overweight. China has replaced India as the economy on which fund managers were most bullish on.
Andrew Holland, CEO, Ambit Investment Advisors, said India looked to be reasonably valued on a standalone basis. But when seen in a relative sense with say, China or Korea, then it looked neutral. “Global investors would prefer China or Korea as those economies are in a better position to recover. There is an overall selling by emerging market funds and India cannot escape that. Going forward, investors may not want to buy emerging market but would look at country-specific dedicated funds. That could see more money going into markets such as China, Brazil or Korea compared to India,” Holland said.
As per Morningstar, the September quarter saw India-focussed offshore equity funds witnessing a net outflow of $1 billion, whereas India-focussed ETFs registered a net outflow of about $1.2 billion. Data showed that FII flows have slowed in the equity segment and the current calendar year has seen only a fraction of the flows witnessed in the last couple of years.
In 2015, FIIs have made net investments of $3.3 billion in the equity market, compared with $14.64 billion in 2014. The impact of the reduced foreign flows is clearly visible in the stock market.
In 2015, the benchmark Sensex has lost 6.11 per cent after registering a gain of almost 30 per cent in 2014