The sustained fall in the rupee seems to have soured the investment sentiment among FIIs in stock markets.
Foreign institutional investors (FIIs),the main drivers of equities,reined in their buying,analysis of their buying pattern based on the five-day moving average data shows.
The 5-day moving average declined to $27.32 million this month from $273.7 million in May. The rupee touched an all-time low of 58.14 against the dollar on Monday.
Domestic investors have turned buyers as seen by the DIIs 5-day moving average,which jumped to $3 million from negative $126 million last month. Investment patterns of FIIs and DIIs are typically inverse in nature when FIIs buy,DIIs sell and vice versa. This year,FIIs shopped for equities worth over $15 billion amid consistent selling by DIIs amounting to about $9 billion.
Between April 12 and May 20,the benchmark BSE Sensex gained more than 9% as FIIs bought shares worth $3.7 billion. In the same period,DIIs sold shares worth $2.3 billion.
However,as the rupee’s decline gained momentum post May 20,overseas investors bought just $1.68-billion worth of shares,while DIIs sold shares worth just $895 million.
Experts said the DIIs may have initiated some stock-specific buying as the market is trading near its long-term valuations. The markets are at a 5% discount to their long-term valuations,but still at a 20% discount to their all-time highs. So,there are still good growth opportunities in the equity segment, said Nirakar Pradhan,chief investment officer,Future Generali India.
Pradhan expects 15-20% returns from Indian equities in the next 5-10 years.
We are looking at auto,banking and financials,pharma and IT as a depreciating rupee could benefit these export-oriented sectors.
According to fund managers,it is the earnings visibility,more than valuations,that is driving investment decisions of institutional investors. Overall,the markets are slightly below long-term valuations. Certain sectors are available at cheap valuations,but one must look at the earnings potential, said Rajnish Rastogi,fund manager,Motilal Oswal.
Economists feel the possibility of a pullback in quantitative easing (QE) measures in the US in the year ahead has slowed down the pace of foreign inflows into emerging markets such as India.
This could deter foreign investors as it may spell further weakness in the rupee,thereby hurting returns for FIIs.
It will be difficult to predict the future movement of domestic currency. Countries with high current-account deficit (CAD) are susceptible to foreign flows and India falls in this category. So far,the underlying weakness of the economy was masked by the strong flows. The fear of QE tapering off is triggered by signs of a recovery in US, said Sonal Verma,economist,Nomura.
However,some brokerages expect FII flows to remain positive in the near term.
We expect the Sensex to touch 23,000 by end of the current calendar year. While hedge funds will sell when they sense a correction,sovereign wealth funds and the long-holding community would not go by just the market sentiment, said Saurabh Mukherjea,CEO – Institutional Equities,Ambit Capital.