Will FPIs give great returns?

Sensex and Nifty marked their sharpest budget rally ever in full swing, rising 5% in a single day. but wait! Not everyone was so excited. Foreign Portfolio Investors (FPIs) chose to buy only Shares worth Rs 1,500 crore on the same day after dumping over 4,600 crore in the last trading session, shows data from National Securities Depository Ltd.

Such divergence is almost becoming a pattern between the behavior of Indian stock markets and FPIs.

Recently, when Dalal Street was recovering from its multi-year low of March 2020, foreign investors were again dumping Indian stocks. After a massive fall of over 23% in March 2020, the Sensex and Nifty recorded their best monthly gains of 2020 in April. As indices recover 15%, FPIs become net sellers 6,884 crore during the month.

Enter the calendar year 2021. FPIs end the year with inflows of approx. 26,000 crore, 84% less than in 2020. This was the worst inflow since 2018 when FPIs offloaded value stocks. 32,628 crores. Lo and behold! Sensex and Nifty rise over 24%, best gains in four years. All this makes one wonder: are FPIs really that important for the Indian stock market to perform well? FPIs were a driving force for domestic equities in the past, but are no longer the case, conclude market watchers.

“If FPIs are investing money, it can take the market even higher. But his absence today is not a sign of imminent collapse. Not only domestic institutional investors, high-net-worth individuals and retail investors are also becoming a powerful force, said Ajit Mishra, Vice President of Research at Religare Broking.

In fact, FPI ownership in domestic equities, which was consistently above 20% since the fourth quarter of 2012-13, fell to 18.4% as of December 31, 2021. Banks and IT services, saw the two most FPI-owned sectors. FPI selling is highest in the current financial year.

Although the influence of FPIs in the stock market is waning, the trend of inflows cannot be completely ignored. FPI sold 38,521 crore between October and December 2021, but became net buyers of equities as the new year began. So, are they back on Indian shores?

big questions

There is no easy or definite answer to the previous question. 2022 will have many variables and many scenarios.

With the global financial environment changing, central bankers have focused their attention on combating high inflation and creating a road map for the normalization of monetary policies in a post-pandemic world. The US Fed first indicated three rate hikes of 25 basis points each starting June 2022, but minutes of its recently released December meeting indicated a rate hike as early as March.

Brokerage firm Nomura points out that historically there has been a positive correlation between the expansion of balance sheets of G4 (Germany, Japan, Brazil and India) central banks and FPI inflows into India.

“The correlation remains strong over the past two years of the pandemic when the balance sheets of G4 central banks recorded unprecedented expansion. In FY21, FII (Foreign Institutional Investor) inflows stood at $37.3 billion which was the highest ever recorded in any financial year. Due to the slow pace of balance sheet expansion, there has been a reversal in FII inflows in the recent past,” Nomura said in a report released this month.

If the US Fed aggressively scales back its bond buying program in 2022, it would trigger renewed outflows from all emerging markets, including India. However, analysts such as Sameer Arora, founder and fund manager of Helios Capital, remain optimistic.

“Despite such easy money and abundant liquidity around Covid-19, India did not get enough inflows on a full-fledged basis. The $3.8 billion in inflows in 2021 were next to nothing for a country the size of India, although there were significant outflows into several other countries in the region. And yet, India did well from a return perspective,” Arora said. “Since India and its counterparts haven’t had a big inflow recently, it is expected that there will be no major outflow, if at all.”

Arora believes that FPI inflows will be higher than in 2021 as China is losing its dominant position. “There is a lot of interest in India. The country was relatively favored in emerging markets for the past few years, although the absolute volume was not very large (in public markets). If there is any loss in contact with China, India will be the natural beneficiary of it,” Arora said.

India vs EM Peers

Another emerging concern is India’s relatively high valuations versus emerging market competitors.

Global brokerage houses such as Goldman Sachs, Morgan Stanley, Nomura and UBS had downgraded India in late 2021 due to valuation concerns following an unprecedented rally in India compared to other emerging markets. India outperformed global markets such as Taiwan, Indonesia, Russia, Japan, China and Korea in the calendar year 2021.

The MSCI India Index, which measures the performance of the large and mid-cap segments of the Indian market, rose 27% against the 5% fall in the MSCI Emerging Markets Index during the same period, said a Motilal Oswal Financial Services report. On valuation parameters, MSCI India quoted at a 99% premium, above its historical average of 59 percent for MSCI Emerging Markets. Further, Nifty50 is now trading at 21x at 12-month forward P/E, which is 9% higher than its historical average of 19.2x.

That said, valuation comfort is in the eye of the beholder. India’s valuation has not increased in absolute terms but in relative terms.

“Indian markets are trading at a premium as other markets have fallen heavily,” Arora said, emphasizing that Indian companies are more capital efficient and therefore deserve much higher valuations. He is the head of Taiwan Semiconductor Manufacturing Company (TSMC). Gives example. , a contract manufacturer of chips and a global semiconductor shortage attracts everyone’s eyes.

“They are making record profits but have to invest huge amounts in capital expenditure to be ready for new technologies and capability. They posted a profit of $6 billion in the most recent quarter (December 2021), but announced $40+ billion capex for the year and $100 billion for the next three years. Or bet on the technologies of the future anywhere close to this scale. Therefore, their valuation will always be high.”

local factor

This year seven states will vote to elect their assembly representatives. Uttar Pradesh and Punjab are the major states where elections will be held between February and March. How does a politically charged environment affect FPI flows?

Some brokerages expect populist measures in the upcoming Union Budget—the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA), the PM-Kisan scheme, possible farm loan waivers, and some tax relief that pleases the middle class and those in need. high allocation. At the bottom of India’s economic pyramid. A populist budget beyond expectations or a loss for the Bharatiya Janata Party (BJP) in states like Uttar Pradesh, where it currently rules, could trigger FPI outflows. However, this may only be a small blip.

“FPIs are long term players. Political stability is always on their radar, but they are more concerned about macros and not about elections or how companies have performed in a quarter,” said Ajit Mishra of Religare Broking.

Highlighting the macros, Julius Baer India CEO Ashish Gumasht said barring short-term volatility, the country should continue to attract healthy inflows into 2022. “Some of the recent headwinds (due to a sharp rise in the wholesale price index) are gradually easing in the form of a sharp rise in energy and commodity prices, while the economic environment continues to improve, as indicated by various key indicators and reflected in the tax collection,” he said.

two sides of the same coin

Meanwhile, foreign investors are keeping a close eye on start-up activities in India. They jumped on the bandwagon when the excitement of the 2021 primary market kicked in, replete with new-age public issues from companies like Zomato, Cartrade, Nykaa, Policybazaar and Paytm. In fact, these investors have invested $9.4 billion in the primary market so far in 2021-22.

However, 2022-23 could be a different story. New IPO rules by Indian market regulator, Securities and Exchange Board of India (SEBI) and central banker’s credit restrictions on non-banking financial institutions for IPO financing are expected to reduce the massive oversubscription that we have seen in the primary market . , starting April 2022.

“These rules have nothing to do with FPIs. But, if one side of the market is controlled, the other side behaves the same way,” Arora said.

Another important aspect: Foreign investors are now equally interested in private equity (PE) and venture capital (VC) sectors. Even when the money doesn’t go into the equity market, it is still chasing India into a different asset.

“If there is not enough investment in public stocks in 2022, where has the money gone? It still came to India. PE, VC investors investing in start-ups are the same end investors who come in the listed space,” Arora said.

Eventually, PEs and VCs have to exit their private investments in the public market, or be benchmarked by public market valuations. Experts believe that investors entering the PE sector in themselves indicate their long-term trust in the Indian financial markets.

Whatever happens in the FPI sector, the message for the retail investor seems to be simple. They should track the quarterly movement of FPI ownership for a better understanding of how the market works.

According to brokerage HDFC Securities, “the key to spotting potential gems” is to monitor FPI holding patterns across specific industries and companies. “It can give an insight into the pockets of the Indian economy that they are booming”. Citing a case study, the brokerage said that between September 2018 and June 2020, FPI shareholding in the Indian Energy Exchange (IEX) increased from 13% to 31%, while the stock price provided an average return of 15%. The stock has risen nearly 350 percent between 2020 and now.

The brokerage expects a similar trend in stocks such as Mahindra & Mahindra, MRF, SBI Cards, IIFL Wealth, Credit Access Gramin, Bandhan Bank, Awas Financiers, ICICI Prudential Life and SBI Life.

The bottom line is that FPIs are important market participants. There may or may not be strong FPI inflows in the year 2022, but retail investors will do well in the world by studying their investment patterns in individual stocks or sectors.