FPIs’ June euphoria on Indian equities gone: What’s weighing on their minds?

Mumbai: Foreign institutional investors (FIIs), who returned to Indian equities in a big way in June, have now developed cold feet amid rising coronavirus infections, continued lockdown in some states and Sino-India border tensions.

FIIs were net buyers of Indian shares in the cash market through most of June, but turned net sellers over the last four sessions of the month. After pumping in a net of $2.5 billion, or Rs 18,564 crore, in Indian equities last month, they sold a net of $467 million, or Rs 3,525 crore, in the last four sessions of July.

Equity benchmark Sensex has risen nearly 36 per cent from its lows of 25,639 points hit on March 24, but is still down 13 per cent year to date.

India has become the fourth most Covid-impacted country in the world in terms of number of infections, after the US, Brazil and Russia. Total infections have crossed the 6 lakh mark, merely five days after they had hit 5 lakh. While it took 110 days for coronavirus infections in India to reach 1 lakh, the 6 lakh mark was crossed in next 44 days.

Last month, the International Monetary Fund (IMF) forecast Indian economy to contract 4.5 per cent in FY21, reversing its rather optimistic April forecast of 1.9 per cent growth for the year. It cited the larger-than-anticipated disruption to domestic activity in Asia’s third largest economy due to a severe nationwide lockdown.

“I would underweight India, because visibility is still very low and the stock market has already recovered quite a lot from the bottom. Valuation is quite high and there is a lot of uncertainty regarding corporate earnings,” said Hertta Alava, senior strategist at Nordea in Helsinki, Finland. Nordea manages around 300 billion euros of assets.

Corporate earnings have been waiting for a turnaround for at least six years now and the Covid-19 disruption has pushed this much-awaited recovery even further, and is now not in sight any time soon.

While earnings for the fourth quarter of financial year 2020 saw the early impact of the pandemic-induced lockdown, which started late March, June quarter is expected to be a washout, as the nationwide lockdown stalled business activity through most part of the three-month period.

Sanjay Guglani, CIO of Singapore-based Silverdale Capital, who manages around $1 billion of assets, is staying on the sidelines on Indian equities. “Given the health and economic situation in India, we are being cautious and do not envisage increasing India exposure,” he told from Singapore.

That seemed to be the popular tone.

Maarten Jan Bakkum, senior strategist emerging markets at NNIP Investment Partners, said Indian equities looked vulnerable at this stage, because of the still high virus infection rates, slow normalisation of economic activity and the rapidly widening fiscal imbalance.

“All this is keeping us on the sidelines on Indian equities. We prefer East Asian markets currently,” Bakkum said in an email from The Hague, The Netherlands. NNIP manages 271 billion euros in assets.

Even as the nation grappled with the Covid-19 pandemic, tension on its border with China raised new risks. On June 19, fund-flow tracker EPFR Global pointed out that as Chinese and Indian soldiers clashed in the Galwan Valley, mutual fund investors had already reduced their exposure to both markets for a variety of reasons, ranging from trade tensions for China to policy disappointments in India.

While Chinese equity funds saw their outflow streak hit ninth weeks at $14 billion in the week to June 17, Indian equity funds witnessed their biggest weekly outflow since mid-April.

India’s policy response to tide over the economic crisis triggered by Covid-19 pandemic came in later than expected, and also did not meet expectations.

On May 14, Prime Minister Narendra Modi unveiled a stimulus package worth Rs 20 lakh crore, equivalent to about 10 per cent of India’s GDP, in an address to the nation, pledging to help businesses and individuals tide over the Covid-19 crisis, make the country self-reliant and revive the stalled economy.

However, when the Finance Minister unveiled the details of the plan, dubbed the Atmanirbhar Bharat Abhiyaan, it fell short of expectations and left industry and markets asking for more.

Most FIIs believe the geopolitical tensions were unlikely to escalate. “The news (of border tension) has been a bit worrying, but it remains unthinkable that either China or India would allow this conflict to escalate, given the large economic problems linked to Covid-19 and the difficult relationship China currently has with the US,” Bakkum of NNIP said.

“We would not expect this to become an important negative driver for the Indian market,” he said.

Alava of Nordea said while she was not expecting any major military conflict between the two countries, the relationship between China and India is generally getting a lot worse. “India is now trying to prevent or freeze Chinese FDI and unfortunately it is India, who has more to lose. I doubt there is a long queue of global companies wanting to invest in India in the current economic situation. So I think it would be better to welcome Chinese money,” she said.

Some were optimistic though.

Ghadir Cooper, Global Head of Equities at Barings, said she was constructive on Indian equities on a medium- to long-term basis, given the attractive secular growth dynamics of the economy such as attractive demographic profile of a large young population and under-penetration in many goods and services.

She, however, expressed concerns over the macro-economic scenario. “Unlike other Asian markets, India unfortunately entered the Covid-19 pandemic from a weak cyclical economic position, thereby somewhat constraining its fiscal and monetary response compared with some other emerging economies, North Asia in particular,” said Cooper, who helps oversee $327 billion of assets at Barings.

“As long-term investors, we are prepared to look beyond the short-term cyclical weakness and view it as an opportunity to increase exposure to well-managed sustainable franchises at more attractive valuations,” she said.


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