The Indian stock market has seen a record-breaking amount of foreign institutional investors (FIIs), with nearly $10 billion in investments, withdraw from the country.
This outflow is higher than the $7.9bn seen in the COVID-19 crash in March 2020. It has been attributed a number of factors including the shift in investor sentiment toward China, and the concern about the overvaluation of Indian equity.
The Nifty has fallen by just 4% despite this sell-off. This is significantly lower than the 23% drop during the March 20 crash when the market was in chaos. Domestic Institutional Investors have helped by investing over Rs. 74,200 Crores in October.
Domestic Institutional Investors, primarily Mutual Funds, have acted in a similar way to FIIs during the market crash of 2020.
The trend is similar to that of 2024 when DIIs made investments in India totaling Rs. 4 lakh crore.
Retail investors have shown resilience in the face of market declines. They are not panic-selling, even when foreign funds leave.
‘Buy China, Sell India’ trade drives FII sentiment…
The growing trade of “Buy China and Sell India” is one of the major drivers behind the October FII withdrawal.
The Hang Seng Index has risen 14%, and the Shanghai Composite Index is up 22% over the past month.
The Nifty fell 4%, a result of concerns over India’s valuations and earnings.
Investors believe that China’s stimulus program will be meaningful and will extend beyond ’24 to ’25 or ’26, according to Viktor Shvets.
Investors, he said, believe that the Chinese government has shifted its focus to the economy. They may also be less concerned about geopolitical and political issues.
But China’s good only for short-term traders and not investors.
Investors are divided over whether China is on a sustainable path of recovery. Ed Yardeni, noted economist and investment strategy, warned against the “Buy China Sell India” trading. Yardeni told ICD,
It’s not worth it to sell India for China, unless it is a great trade. But it would be bad long-term investing. India has had an incredible bull market so the price is not cheap. However, I’d stay in India.
Chris Wood, of Jefferies who increased his weighting in China to the detriment of India recently, is a reflection of a growing trend of strategic shifts by global fund managers.
Some investors have been bottom-fishing on the Chinese market in preparation for stimulus. Others see this as temporary trading rather than an indication of structural change.
Macquarie also warned that it is more like a short-term trading strategy than an investment strategy for the long term.
It is possible that more announcements could propel China’s equity market, even as structural problems fester. This is a trading call and not a financial one, as India still has a strong advantage,” said the firm in its report published last week.
Overvaluation concerns loom over India
It’s not just China that is causing the FIIs to sell off. Investor sentiment is impacted by concerns over India’s rising market values, following a long bull run.
Indian stock markets trade at historic highs. This is a sign of overconfidence, given the economic situation.
These valuations have been questioned by factors such as slowing economic growth, inflationary pressures, taxation and interest rates.
Ajay bagga, an experienced market participant, said that investors’ tolerance of missing profits is low in such a climate.
He said that when markets reach such high levels, they are not tolerant of bad earnings or news. The rising dollar index is also putting pressure on emerging markets, like India.
Low corporate profits and macroeconomic challenges
The Indian earnings of the last quarter were disappointing in many sectors. This has added to investor concerns.
Kranthi Babini, Director, Equity Strategy, WealthMills Securities pointed out the influx of speculative money into India. FIIs were net buyers even as late as September.
Investors are turning to Chinese markets for more appealing short- and medium-term values.
The trade war between the US and China is expected to intensify as the US elections approach. These factors are likely to continue regardless of who wins the election, said Narender Singh.
The post Record $10 Billion FII Outflow Hits Indian Stock Market in October – Is China at fault? This post may change as new information becomes available
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