Tuesday's Talking Points
Indian Equity Markets resilient despite recent FII Outflows!
What’s the Point?
In October 2024 (as on October 18, 2024), foreign institutional investors (FIIs) have sold nearly US$9.9 billion in shares in the secondary markets. This is the highest-ever monthly outflow, with the previous record for FII outflows witnessed in March 2020 at around $8.3 billion. Despite the record outflows, the domestic market indices have remained relatively resilient with the NIFTY 500 TRI falling just around 4% in the month of October. With a rise in domestic participation in equities, the impact on indices has been much lesser than the past, when the equity markets had seen significant FII outflows. Currently, India looks to be placed in a unique position, whereby despite investors’ concerns around elevated valuations, the Nation’s overall strong structural growth story has led to a continued faith of Indian investors in the equity markets.
Numbers in Perspective
Source: Bloomberg, *FY2025YTD: 31-Mar-24 to 17-Oct-24, **Oct-24: 01-Oct-24 to 18-Oct-24, $CY2024YTD: 31-Dec-23 to 18-Oct-24
Some Context around the recent FII Outflows
2024 has seen significant activity in India’s primary market due to major IPOs. FIIs invested a net amount of ~US$8.6 billion in the primary markets in CY2024YTD$, higher than the outflow of US$5.8 billion from the secondary markets. Prima facie, while this might just look like switch of investments from secondary to primary markets, the net investment of US$645 million by FIIs in the month of October accounts for only 7% of the US$9.9 billion sale of investments in secondary markets. This implies that there is something more to the story than a mere switch of investments.
Probable Reasons behind the Sale of Equity Investments in India by FIIs
- China – Being viewed as attractive again?
One potentially big reason behind the sale of equity investments by FIIs in the recent times could be the rising optimism around China’s probable comeback. Recently, the People’s Bank of China (PBOC) has rolled out a series of stimulus measures to counter economic challenges and achieve this year’s goal of economic growth of “around 5%”.
PBOC’s statement (September 27, 2024) stated that in terms of the required reserve ratio (RRR) and interest rate cut, the RRR was cut by 0.5%, the 7-day reverse repo rate was cut by 0.2%, and the medium-term lending facility (MLF) rate was cut by 0.3% – from 2.3% to 2%. On October 21, 2024, the loan prime rate (LPR) was also lowered.
On the fiscal side, China’s Government announced that it would issue an additional 2 trillion yuan (about $284 billion) in special bonds to stimulate consumption and investment. There was also a discussion of providing banks with a capital infusion of 1 trillion yuan (about $142 billion). These measures were designed to strengthen the property sector, and to promote economic growth in order to boost employment and people’s income.
As a result of the adoption of an expansionary monetary policy along with certain macro-prudential policies by PBOC, China’s Hang Seng Index and Shanghai Shenzhen CSI 300 Index rose by nearly 4% and 8% respectively on September 30, 2024. In CY2024YTD (as on October 22, 2024), both the indices have risen by 20% and 15% respectively. With the recent rise in China’s market levels and lower equity market valuations, China may be viewed as relatively more attractive in the eyes of the foreign investors, which could have led to a shift in investments from the India to China.
- Elevated Equity Market Valuations – A Point of Concern?
The sharp rise in domestic market in recent times has led to a rise in the 1-year forward valuation of large caps (NIFTY 100 Index), which stands at a ~20% premium to its 10-year average as on September 2024. Valuations in the mid and small cap segments are also trading at higher levels. As India’s premium versus its long-term average and MSCI Emerging Markets Index has widened in recent years, it has led to concerns around the attractiveness of Indian equity markets. This could have been second potential reason behind FIIs selling their equity investments in India for cheaper alternatives – China being one of them.
The talk around India’s elevated valuations are not a surprise to any reader. But it would be erroneous to conclude solely from this metric that markets are expensive. This is because India’s economic growth and growth prospects have improved, along with a relatively lower interest rate environment. These factors could effectively justify the higher valuation multiples.
Are the recent FII Outflows a cause for worry?
Unlike 2008-09 or 2015-16, the impact FII outflows on equity market indices recently has become much lesser with the rise in domestic participation in equities. In fact, between Jan-21 and Jun-23, when FIIs sold equity investments worth ₹27,211 crore, NIFTY 500 TRI rose 18% as a result of higher investments made by domestic investors.
Source: Bloomberg. Period <= 12 months: Returns absolute in nature. Period > 12 months: Returns compounded in nature
India's growth narrative is characterized by a confluence of demographic advantages, strategic government initiatives, and an unwavering commitment to innovation and sustainability. The Government is taking various initiatives to enhance its manufacturing and service sectors to become a global economic powerhouse. Considering that, while some degree of scepticism due to elevated equity market valuations or recent steep FII outflows prevail, these may not be substantial to warrant pessimism about the long-term prospects of Indian equities.
Sources: NSDL, Bloomberg, PBOC, Kotak Institutional Equities, and other publicly available information
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