Experts cautiously optimistic on reversal of FII outflows post Trump victory

The recent past has seen foreign institutional investors (FIIs) selling shares worth a whopping $12.5 billion in a span of a little over a month

A majority of market experts believe that Donald Trump winning the US Presidential elections could have a positive impact in terms of foreign flows into the Indian market even as FIIs have been aggressively selling shares in the recent past.

Trump’s strong anti-China views coupled with the fact that India provides a high-growth market with strong long-term prospects could lead to a reversal of trend, they say though they add that one should not expect a sudden u-turn in FII behaviour.

“There is a good chance that the US economy will strengthen, reducing the uncertainty around regime change. If the markets hold steady, global investors may gain more confidence in investing in major global enterprises. India, for instance, has recently experienced significant capital outflows, but there’s a strong possibility that these outflows will slow down or even reverse,” says Sandeep Bagla, CEO, Trust Mutual Fund.

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This assumes significance as the recent past has seen foreign institutional investors (FIIs) selling shares worth a whopping $12.5 billion in a span of a little over a month — FIIs were net sellers at $11. 2 billion in October and have sold shares worth $1.3 billion till date in the current month.

Incidentally, the net investments of FIIs in the current calendar year has dipped into negative territory with net flows in CY24 pegged at $407 million.

Meanwhile, Trump’s win has brought the focus back to the debate around ‘Buy China, Sell India’ as experts believe that the new US President’s strong anti-China stance during his first stint as president would work in India’s favour this time.

V K Vijaykumar, Chief Investment Strategist, Geojit Financial Services, believes that the Trump presidency can be very good since Trump is anti-China. “That (FII outflows) is going to stop completely and perhaps even might reverse,” he says.

While there are some concerns around Trump's possible policy towards emerging markets, Trideep Bhattacharya, CIO - Equity, Edelweiss Mutual Fund believes that there is potential for India even if the Trump administration adopts a stricter stance towards emerging markets.

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“We believe a Trump administration could imply a tougher allocation regime towards emerging markets as a whole, yet anticipate that India may receive a larger share within the emerging markets allocation,” he says.

In a similar context, independent analyst and market veteran Ajay Bagga says, “It's not China versus India. Already $15 billion had gone out (from both markets). It's all going back to the US. So it's India and China versus US in terms of flows. And we'll get our fair share.”

“I don’t think anyone will touch China in a rush... at least they will wait till February or March to see what Trump does,” adds Bagga.

There is, however, a cautious optimism in the markets as there are other concerns as well and while experts believe that foreign investors could change their stance towards Indian markets, it will take time, they say.

Siddarth Bhamre, Head of Research at Asit C Mehta, believes that the recent trend of "sell India, buy China" was driven primarily by valuations and may or may not be impacted by the elections.

“India's market was very expensive, while China's was very cheap,” says Bhamre. “China was infusing stimulus to kick-start its economy, and that’s why the strategy was there,” he adds. However, he suggests that this trend may lose momentum with Trump's influence. “I won't say that would reverse immediately. But yes, the trend might reduce,” he says.

On concerns whether a stronger US dollar, would make more investors prefer to invest in the US rather than emerging economies, Bagla says, “To some extent, this could happen, but India remains a high-growth market with relatively cheaper valuations compared to the US. In the short term, investments may shift between countries, but there will always be some allocation to emerging markets, including India. Over time, these allocations are likely to stabilise.”

“Investors will do well to not get carried away by the celebrations in the equity market. Better approach would be to carefully select certain stocks and buy gradually over the next 4-8 weeks,” says Gaurav Dua, SVP & Head - Capital Market Strategy, Sharekhan by BNP Paribas, adding that policies of the new administration are inflationary in nature and could resulting in impact on flows into several emerging markets, including India.