4 reasons why FIIs are selling Indian stocks
Foreign investors prefer to invest in India. They can find stocks in the small and large categories that are fundamentally strong and growing fast.
Foreign Institutional Investors (FIIs) have been behind the boom in the stock market.
Historically, whenever Indian stocks declined or rose sharply, FIIs were usually behind it.
But now it is not so. Indian retail investors have made their presence felt. Through direct investment in mutual funds, retail investors have reduced the influence of FIIs in the market.
But that doesn’t mean they don’t have any effect. They definitely do. And when they buy or sell in large quantities, the market cannot move in the opposite direction until they are done.
For example, did you know that FIIs have been net sellers of Rs 381 billion (bn) since the beginning of the year?
And it followed 1,214 trillion (tn) of net sales in the year 2022.
This is correct! FIIs are selling. They are dumping Indian stocks.
In fact, they have been indifferent to India for quite some time now. In the boom year of 2021, FIIs were marginal net buyers to the tune of Rs 257.5 billion.
Mind you, this was for the full year 2021. That’s just a little over 2 billion rupees in net buying per month in a raging bull market. It was Indian retail investors who drove the market higher.
So it means foreigners did not buy in covid bull market. Then since the market peaked in 2021, they have been selling continuously. And they’ve picked up the pace of sales this year.
Is it any surprise that the Indian stock market has been struggling to make new highs since October 2021?
This is FII’s fault.
But why? What are the reasons for this relentless selling?
Well, we can think of four main reasons. Let’s examine them one by one…
Central banks around the world are raising interest rates to fight inflation.
During Covid, they tightened liquidity and cut rates to record low levels (in some cases even zero). This was to ensure that their economies do not freeze during the lockdown.
They ignored the risks of higher inflation as it seemed like a remote possibility during Covid.
But soon things changed. You can say, the economic situation turned 180 degrees. As people started getting back to their regular lives, inflation hit hard.
Central banks are raising interest rates and trying to outrun inflation before it gets out of hand. They’ve been at it ever since. There are no signs of interest rates coming down anytime soon. Thus the stock market will have to get used to higher interest rates.
This is bad news for emerging markets like India. Whenever, interest rates rise in developed countries, money flows back to these economies as they are considered ‘safe’.
This has been going on since the second half of 2021 and it doesn’t seem to be ending anytime soon.
Compared to other emerging markets, the rupee has depreciated less. But this cannot hide the fact that the depreciation of the rupee has been significant.
From 73 to a dollar in September 2021, the rupee fell to 83 in October 2022. This is a decline of 12% in 13 months.
This is a big loss for any foreigner holding Indian assets. If the value of the property does not increase by at least 12% during this period, it will have to face losses.
During this time the Indian stock markets were falling. Thus FII suffered a double loss on stocks and currency.
Thus they are selling shares in India and other emerging markets and taking the money back to the US and other developed markets.
- Flight to safety due to recession fears
Almost everyone thinks the US will slide into recession this year along with the rest of the developed world.
This is a very real possibility. And as they say, when America sneezes, the world catches cold. The market feels that if the US is in recession, there could be a global recession. This fear is driving the markets down.
China has been a pariah in the financial markets since Covid. We have seen draconian lockdowns, investigations against major Chinese traders, shutdown of many industries and a disastrous zero-covid policy.
And this is apart from all the geopolitical tensions with Taiwan and the US.
But 2023 may be different. China is reopening for business.
By this we mean pre-Covid business as usual. This will give a big boost to its economy. Thus its stock market, as it has fallen, will be very attractive to foreign investors.
This partly explains why we have seen a recent spurt in FII selling in India. A part of the fund is going to China along with America.
This will be a source of pressure on the Indian market in the short term.
With that, let’s take a look at 5 well-known Indian companies in which FIIs have sold significant stake in the last one year.
#1 Tech Mahindra
This IT stock is under pressure since December 2021. And the reason is not difficult to find.
At the end of December 2021 quarter, FIIs held 35.36% stake in the firm. This share is continuously falling.
FII holding came down to 27.95% in the December 2022 quarter. While the company remains fundamentally strong, the stock has been caught up in a selloff in US tech stocks. The stock is down 455 from its all-time high.
#2 Jubilant Foodworks
The Domino’s Pizza franchise in India has been one of the top performing stocks since Covid. During the lockdown, the company’s business boomed, leading to a huge jump in food delivery.
The stock will top out in October 2021 along with the rest of the market. The stock didn’t fall much immediately. But since 2022, it has been a huge disappointment for investors. From peak to trough, the stock is down 52%.
Last week, the stock had hit a 52-week low. Despite the huge correction, the stock is still trading at prohibitively high PE ratio of 70.
FII selling largely explains the weakness in the stock. It was the FII favorite.
FIIs held 39.77% stake in the firm in the December 2021 quarter. It had come down to 26.77% in the December 2022 quarter.
#3 Naveen Fluorine
The company is one of the leading chemical firms in India. It was one of the biggest beneficiaries of the China Plus One trend in the global chemical sector.
Innovative fluorine has flourished in the last few years as businesses moved out of China. The company’s sales have grown from just Rs 10 billion in FY19 to Rs 14.5 billion in FY22. Its net profit has increased from Rs 1.5 billion to Rs 2.6 billion in the same period.
Unexpectedly, the stock rose from Rs 600 in July 2019 to Rs 4,800 in September 2022.
Even covid didn’t cause stock crash. Its price has risen even in 2022 when the rest of the markets fell.
The strong belief of FIIs and domestic mutual funds has been the driving force behind this stock.
This is one stock in which FIIs would have made huge profits with a simple buy and hold strategy despite rupee depreciation.
However, FIIs are booking profits. His stake now stands at 19.19%, up from 25.25% in December 2021.
#4 Indian Energy Exchange
It was a great multibagger stock during the bull market of 2020-21.
In the Covid crash, the stock fell to Rs 43. Then it increased to Rs 300 till December 2021. Strong buying by FIIs certainly helped the stock to gain momentum.
But as they say, what goes up must come down. FIIs have been selling this stock since last one year. And the price has skyrocketed. The stock is down 60 per cent from its peak.
FIIs held 31% stake in the firm as of December 2021. By December 2022, this had fallen to 15.5%.
#5 Balrampur Sugar Mill
The stock of India’s largest sugar company increased 6 times after the Covid crash. This was due to rising sugar prices and government pressure for blending ethanol in auto fuel.
During this time it also got strong support from FIIs.
But now things have changed. The company’s future growth and margins don’t look as good as they did last year. And FIIs are not known for their patience.
His shareholding is set to fall to 13.86% in the December 2022 quarter from a shareholding of 20.37% in December 2021.
FIIs are known drivers of specific stocks as well as the overall market.
Their dominance over the benchmark indices may have waned over the years due to the rise of the Indian retail investor.
But they still dominate the stocks in which they have major stakes. If they continue to sell off, these stocks are likely to underperform for several quarters.
Investors should keep this in mind while considering stocks with high FII holding.
Disclaimer: This article is for information purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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