Tensions escalating between Russia and Ukraine could put a dampener on sentiment among FIIs

With several central banks raising interest rates, the sentiment overseas was cautious enough already but emerging geopolitical tensions like the Russia-Ukraine conflict drove the final nail in the coffin for foreign institutional investor (FII) investment in Indian equities.

The sell-off by FIIs in 2022 was largely due to tightening liquidity, rising interest rates and lofty stock valuations, as pointed out by several market participants.

The year was a painful one in financial markets with almost all traditional assets delivering significant losses, said Ben Inker, co-head of the asset allocation team at GMO, a global investment management firm, in its quarterly newsletter.

“The correlation of losses to previous silliness was not perfect—emerging equities and debt were hurt by the war in the Ukraine in a way that owed nothing to the previous bull market, and in the US a strong year for value didn’t actually do as much for the cheapest value stocks as one would have expected,” Inker wrote.

Soon after Russia invaded Ukraine on February 24, a series of stringent sanctions and central bank restrictions were imposed on Russia.

In fact, some Russian banks were even cut off from the SWIFT network and the country’s equity market was deemed "uninvestable". Following this, MSCI announced Russia’s removal from its Emerging Markets Index on March 2. At the start of the year, Russia accounted for around 4 percent of the index, but on March 9, Russia’s weightage slid to zero.

Also Read | One year of Ukraine war: Bulls brush off Russian belligerence with aplomb; Powell, not Putin, key overhang

Consequently, dollar outflows resulted in the rupee nosediving to lifetime lows against the greenback, prompting an intervention from the Reserve Bank of India, which deployed the country’s forex kitty to defend the local currency.

“Russia collapsed, China collapsed, emerging markets in general collapsed. The whole system froze in Russia. So, India's weightage actually went up. Most large institutions that follow the weighted system of investing money had to sell Indian equities because our weightage was disproportionately higher,” Madhusudan Kela, founder of MK Ventures, had explained at Moneycontrol’s Muhurat Roundtable in 2022.

Manish Chokhani, director, Enam Holdings, had added, “Foreign investors could not sell from China and they could not sell from Russia. So you sell where you're able to, which was India.”

However, in the past one year, Indian headline indices have outperformed most global peers, with the domestic economy being able to recover from a global supply chain disruption and high energy prices sooner than others. However, inflation continued to remain a pain point.

War-associated risks would definitely impact the risk appetite of overseas investors, but Mohit Nigam, fund manager and head, portfolio management services, Hem Securities, believes that the Indian economy is strong, resilient and has firm growth prospects.

Even as 2022 was a bad year for investors, FII sentiment seems to have turned slightly better due to relatively cheap valuations and strong growth prospects.

Nigam pointed out that FII selling slowed in February with buying in construction, mining, metal and automobile stocks. FIIs have turned buyers in the IT sector from late January, he added.

Even as the hangover of the war escalating remains, heightened tensions globally could further put a dampener on investor sentiment overseas with FIIs rushing to safety.

Inker said, “When bad things happen to relatively cheap assets, it generally creates a good buying opportunity, and we believe emerging equity and debt and US deep value stocks are well worth investing in today.”