Markets have left worst selloff by foreign institutions behind, for now: Experts

FII flows set to rise

Foreign Institutional Investors (FIIs) sold around a net $8 billion of shares in the quarter gone by, but the worst may be behind Indian markets, said several market experts.

FIIs have already turned net buyers over the last couple of weeks. Foreign investors have been net buyers in the last five sessions, and with the recent panic over the banking crisis in the US and Europe abating, along with the Federal Reserve likely aiming to slow its pace of rate hikes, hope is that the trend of FII participation will continue.

Sanjeev Hota, Vice President and head of research at Sharekhan BNP Paribas, told Moneycontrol recently that he was reasonably optimistic on the outlook for Indian markets.

"FIIs are eventually going to return to India in overwhelming numbers and Domestic Institutional Investors (DIIs) will continue to support the markets, which are backed by solid Systematic Investment Plan (SIP) contributions" he stated.

Sanjiv Bhasin, Director of IIFL Securities, in a recent conversation with Moneycontrol said he thinks the pessimism in the Indian markets is overdone. “Due to expensive valuations earlier, FII money has flown to China,” he said, adding Indian markets were consolidating with Nifty primed for the 18,000 levels by the end of April 2023 in a surprise for the bears."

“Local flows are going to dominate the market going ahead and earnings are going decide the future course of action in the Nifty,” Bhasin added.

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NSE data shows that DIIs bought shares worth Rs 83,199 crore in the first quarter of 2023. FIIs sold shares worth Rs 50,558 crore in the same period.  Net investment by foreign institutions turned positive in March, boosted by the investment US-based GQG Partners made in Adani Group companies.

FIIs have been selling shares consistently for the last three months. On March 2, GQG Partners added shares of Rs 15,446 crore in four group companies of the Adani group. As a result, total market capitalization of Adani Group increased by more than Rs 81,970 crore in one day, boosting investor sentiment and restoring market confidence.

Adani Enterprises, Adani Ports & Special Economic Zones, Adani Transmission and Adani Green Energy had taken a hit after US-based short seller Hindenburg Research published a report alleging irregularities by Adani Group.

The Adani stock crisis, followed by the collapse of California- based Silicon Valley Bank and the sale of troubled Credit Suisse to UBS, were the main reasons for volatility in the markets a few weeks ago. Volatility is now appearing to wane after stock valuations dropped.

According to experts, the correction in the market has made it attractive and this can excite more investors in the weeks and months ahead.  "The prospects of FPI (Foreign Portfolio Investment) in the future look more positive. While Indian valuations are quite high, the recent market correction has made prices a bit more reasonable than before," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

"FPI bankers turning buyers into banking will help banking stocks move higher on strong 4th quarter results," said Vijayakumar. Over the past week, the Nifty Bank index has risen by more than 3 percent following a steep correction in the index at the beginning of this year.

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Hota of Sharekhan BNP Paribas expects net FII inflows to India this year after the sharp outflows in the past year. "Global macroeconomic conditions are showing signs of easing," he said, "although it is still too early to say when the volatility will end."

“At a 5-year valuation of 17.5x based on forward earnings, putting new money into the market seems reasonable. Also, for long-term investors, it is the right time to begin investing after the recent correction in a cautious way,” he further added.

According to Hota, the long-term structural growth story in India looks solid, which gives investors ample opportunity to pick up on quality stocks. Indian markets appear to be more stable and resilient in comparison with their peers in Europe and the US, added the expert.

“DIIs also will continue to support the broader index, fueled by the SIPs of investors. Mutual funds hence are placed comfortably with no reason to worry for the industry going ahead for the current financial year,” Hota added.

The performance of FIIs has made it to the headlines for the several months mainly due to rising interest rates in the US. A rise in US interest rates does not bode well for the Indian market because it generally results in foreign investors pulling their money out of emerging markets and into more attractive US Treasuries and money markets.

While FIIs have been busy selling Indian stocks, DIIs like mutual funds have been buying more Indian stocks regardless of market volatility. That, experts say, is set to take a turn for the better.