WHAT HAPPENS when close to $25 billion gets pulled out of equities in a span of 12 months? The most probable outcome would be mass capitulation on the Street. That was not to be though. Foreign portfolio investors did pull out en masse over the past one year, but benchmark indices — the Sensex and Nifty — have withstood the slaughter — falling 2,756 points (-4.46%) to 58,960 and 932 points (-5.06%) to 17,486, as of October 18.
"When was the last time you had seen the S&P 500 down 22% year-to-date and the Indian indices staying unchanged?" (See: The divergence Is showing and How), asks Sunil Singhania, founder of Abakkus Asset Manager LLP.
Such a performance would be dubbed as "resilience of the India Growth Story." Indeed. Consider what happened in 2008. When ₹52,987 crore was taken out, the market had caved in 55%. Today, 14 years later, the velocity of the money is 3,81 times that of the 2008 outflow, yet the indices tell a different story.
But whether the indices will be able to weather another bout of massive selling by foreign investors, who own over 25% of India's market cap, remains a question. Total FPI holding value as on October 27 is ₹46.82 lakh crore) based on June 2022 shareholding in 1,582 stocks.
To begin with, 2008 was a different era altogether where the credit crisis was brewing in the financial sector, but this time round it's a macro challenge blowing across developed economies, including the U.S., the world's biggest economy.
In its quest to temper the four-decade high inflation, the U.S. Federal Reserve has hiked interest rates to 3-3.25% — highest since early 2008 — on the back of a third consecutive 0.75 percentage point hike in September. With the Fed likely to further hike rates by 75 basis points this November, Morgan Stanley strategists believe the current Fed chairman, Jerome Powell, looks increasingly tempted to copy Alan Greenspan's playbook, when in 1994 the-then central bank chairman doubled interest rates to 6% with seven consequent hikes.
Back home experts expect Fed to stay on course.
"The market is pricing in a peak of around 4.9% Fed fund rate in Q1CY23 with a very gradual slide towards 4.55% by December 2023," says Upasna Bhardwaj, senior economist at Kotak Mahindra Bank.
A rising interest rate scenario in the U.S. has created a risk-off investment climate as it has led to the strengthening of the U.S. dollar and assets denominated in the Greenback. This is prompting investors to dump emerging market equities, including India. The rising dollar has pummelled the rupee to an all-time low, in turn, making imports costlier and widening the current account deficit for a country that meets nearly 90% of its energy needs through imports. The Reserve Bank of India has seen a $100 billion drop in forex reserves amid dollar sales to curb the slide in the currency.
Bhardwaj expects India to feel the pain. "A growing rhetoric of India decoupling from the rest of the world may not bear out. While India could fare well relatively, policy steps (and missteps) of developed markets will reflect in external (CAD/BOP/INR) and internal (inflation/fiscal) balances, which will be headwinds for domestic economic growth," predicts Bhardwaj.
Against such a backdrop, stocks which have a huge FII holding could be vulnerable to a selloff, including those that make up the Nifty 50. More than 24 stocks have seen FPI holding coming down between 0.27 bps to as high as 1,800 bps over the past three quarters till June 2022. The stock which has seen the maximum selloff is Zee Entertainment wherein FPI holding has fallen from 57.18% to 39.18%. The other stocks that bore the brunt of the fire sale include IndusInd Bank, Tech Mahindra, Info Edge, both HDFC Bank and HDFC, besides Crompton Greaves Consumer and Axis Bank. All these scrips have seen 4-5% drop in FPI holdings.
A closer look at the Nifty 50 universe shows that over the past three quarters, these investors have part-dumped 41 stocks between 0.15 bps and 515 bps, with just nine stocks showing an increase between 0.36 bps and 288 bps. Of the gainers, Sun Pharma has seen maximum stake addition by FPIs (288 bps). Among the stocks that saw FPIs exit, seven — IndusInd Bank, Tech Mahindra, HDFC Bank, Axis Bank, HCL Technologies, HDFC and Divi's Lab — fell between 418 bps and 515 bps.
Currently, 11 stocks from the Nifty 50 have holdings in excess of 30% to 68%, of which HDFC, which is being merged into HDFC Bank, has the highest holding at 67.75% as of June 2022, followed by Apollo Hospitals. Three private bank stocks — Axis Bank, IndusInd Bank and Kotak Mahindra Bank — have holdings in the 40% to 45% range.
FPIs will continue to head for the exit right through the calendar year, feels Ambareesh Baliga, independent market expert and portfolio advisor. "While we may not see a panic selloff, foreign investors will continue to head back to the safety of dollar as Fed battles inflation," says Baliga.
He could well be right. For the past two months, foreign investors have turned net sellers, dumping equities worth over ₹15,000 crore between September and October 18 (See: Take Me Home, Country Roads). Though valuations do not seem out of whack, India Inc's second quarter performance will determine which way the wind will blow. "Lot of manufacturing companies had shored up raw materials fearing elevated price levels, but all of these companies will be saddled with inventory losses following a steep correction in commodity prices," says Baliga.
Singhania, however, believes India is increasingly standing out as a market that foreign investors have no alternative to. Back from the U.S. after attending the Greenwich Economic Forum, a prominent conclave of the global alternative investment industry, Singhania says, "The sense I got from global investors is that they are increasingly talking of pulling out of China and investing in India. The question is more of "when" and not "whether" we should invest in India.
Though India stands out as an island of growth in a world where economies are fast hurtling towards recession, being immune to macro winds might be just wishful thinking. Looks like there is more pain in store before foreign investors see value in buying the India story all over again.