The tide seems to have turned for foreign institutional investors (FIIs) flows to India. FIIs, who until the current month have invested in the Indian equity market in 2015, sold off Rs 3,467 crore worth of equities in May, according to official data.
In the past fortnight, they have offloaded stocks worth Rs 13,110 crore, data suggests. The benchmark indices, the S&P BSE Sensex and the CNX Nifty have tumbled 9% each during this period.
The fall in the mid-cap and small-cap indices has been sharper with the CNX Mid-cap and CNX Small-cap indices losing 9.2% and 10.7% respectively during this period.
Since April 15, barring the big net inflow of Rs 16,353 crore on April 21 on account of FIIs buying Daiichi Sankyo's 8.9% stake in Sun Pharmaceuticals, the FIIs have been net sellers on the other 13 trading days till date.
On May 6 when the index crashed 723 points, FII selloff in the equity segment touched nearly Rs 1,700 crore, data suggests.
Why have the FIIs turned negative on India?
Weak corporate earnings, slow implementation of reforms, nearly 40% jump in crude oil prices to around $69 levels in just six months, possibility of a rate hike by the US Federal Reserve (US Fed), and weakening rupee against the US dollar are some of the reasons that have dented market sentiment.
Analysts suggest till now, over-allocation of portfolio flows into emerging markets, including India prompted investors to overlook weak growth. That apart, expecting the new government in India to catalyse quick rebound in earnings; expectations that decline in global commodity prices will prop up earnings and the hope that global liquidity will continue boost equities notwithstanding the correction in commodity prices are some of the factors that kept the market sentiment buoyant.
However, Dhananjay Sinha, head of institutional research at Emkay Global Financial Services feels that the exhilarated expectations from change of guard at the centre now seem to be wearing as earnings growth rebound has failed to materialise.
"While Indian business cycle today reflect several characteristics of the 2000-2003 adjustment cycle, which preceded the 2004-2010 economic boom, markets are already ahead of the 2007 valuations. It implies ability of the market to price in fundamentals now 4 - 5 years in advance," he says.
Where are the FIIs re-deploying this cash?
Analysts say that the FIIs are now looking at China as an alternate investment destination in the Asian region. Going ahead, the FIIs will continue to buy stocks where they feel that the fundamentals remain solid and where they see value, they suggest.
Explains Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India): "The primary reason for the FII withdrawal is China getting more money. It is one of the favoured market at the moment and a lot of emerging market (EM) fund flows have been diverted there. As a result, India is seeing a repercussion of that trend. Investment in Sun Pharma, too, would have sucked out some liquidity."
Andrew Holland, chief executive officer, Ambit Investment Advisors believes that since the consensus have been overweight on India for quite some time now, investors now want to get to China very quickly and rebalance their stance.
"Investors we have spoken to are taking a divergent view and putting incremental funds into China. I expect the selling to slowdown now and a lot of switching funds to China have been done for the time being. While we don't expect India to get incremental flows from the FIIs in the second half of 2015, the selling should slow down," he says.
Besides China, investors are also looking to up their exposure to Vietnam. CLSA, for instance, plans to increase its Vietnam weightage by one percentage point in its Asia Pacific (ex-Japan) portfolio, reports suggest. In a recent interview to Business Standard, renowned global investor Marc Faber also suggested Vietnam as an alternate investment destination where investors could get significant returns over the next few years.
As regards India, Arora also feels that it is more of a case where India may not get incremental funds from the FIIs going ahead as opposed to them withdrawing money from the Indian markets.
"Since Indian markets have corrected a fair bit from their peak levels, it is a difficult decision for the FIIs whether to withdraw from India or look to redeploy cash here. India is a better place to invest compared to China from a three - five year perspective. I don't believe that this trend of withdrawal from the Indian markets as seen over the last fortnight will continue at the same pace going ahead," Arora says.
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