Extreme Foreign Selloff in India Stocks May Ease, History Shows

(Bloomberg) -- If history is a guide, the heaviest selling by foreigners of Indian stocks since the global financial crisis is poised to end, with any turnaround likely to be led by stocks with major holdings among overseas investors.

That's the view from Bloomberg Intelligence after foreign institutional investors net-sold $10 billion of local stocks since October, the most since 2008, on concerns over faster-than-expected policy tightening by the U.S. Federal Reserve. In January alone, FIIs dumped $4.8 billion of shares, the largest outflow across key emerging markets and the second-highest monthly tally for India.

“The current sharp sell off may signal a climactic move,” Nitin Chanduka and Kumar Gautam, analysts with Bloomberg Intelligence wrote in a note. “In past instances of major FII exodus from India, foreign selling has generally eased when peak-to-trough outflows neared $8-$10 billion, with the sole exception of the 2008 crisis.”

A pause in this persistent selling would also be a shot in the arm for stocks with high foreign ownership, especially financial and technology companies, due to the close relationship between performances to fund flows. Housing Development Finance Corp., HDFC Bank Ltd., ICICI Bank Ltd. and Infosys Ltd. are among the firms mentioned in the report.

“The average monthly correlation between returns and foreign flows is more than 70% over the past five years,” the analysts said. “Since foreign derisking has reached historic extremes, stocks with high foreign ownership could rally.”