Foreign Investors Make A U-Turn On Indian Stocks

Foreign investors turned net buyers of Indian equities in July after three months of selloff.

Overseas inflows into the stock market stood at more than Rs 500 crore during the month—the first time since March. That's a relief, at least for now, as India overall saw its worst foreign fund outflow in a decade in the first half of 2018.

“It's a positive development, but too early to indicate a reversal in the trend as global issues of a trade war and higher U.S. interest rates have not dissipated,” said Hemindra Hazari , an independent market analyst.

Aashish Somaiyaa, chief executive officer at Motilal Oswal Asset Management Company, said foreign fund outflow has generally been in response to global developments whose origins may not really be rooted in the domestic economy. “It's best to focus on the local on-ground situation; focus portfolios on domestically oriented secular businesses and remain invested,” Somaiyaa said. “In fact, if there's a FII selling-led market route; better that we increase our commitments to benefit from their eventual return.”

Domestic institutions, however, bought equities at their slowest pace since January this year with a net purchase of over Rs 4,200 crore in July. Passive investments into exchange-traded funds favoured India among other emerging markets. In the last one month, India saw an inflow of nearly $400 million (about Rs 2,740 crore) while Brazil saw an outflow of over $500 million, followed by Taiwan at more than $300 million.

The NSE Nifty 50 Index rose 6 percent in the last one month compared with 1.7 percent rise in the MSCI Emerging Market index.

But the recent market rally can be attributed to about five-six stocks that represented 70 percent of the Nifty upmove, said Chakri Lokpriya, managing director at TCG Asset Management. The other Nifty components and broader market was oversold and saw foreign and exchange-trade fund inflow as a result, he said. “But it's too early to call for trend reversal and FII inflows are unlikely to pick up meaningfully until the rupee stabilises and earnings growth gathers pace.”

The Nifty returned 6 percent in local currency in July, lower than Brazil's 8.9 percent and Thailand's 6.7 percent. The Relative Strength Index, which measures momentum behind the price, has turned ‘overbought' for the Indian benchmark for the second time this year. None of the developed or emerging markets are at this level.

RSI can remain overbought for a few months before any material reversal takes place, said Hemen Kapadia of KR Choksey. In fact, the monthly RSI in the Nifty has been overbought or just below overbought for the past 15 months or so and, with a hiccup, the trend remains bullish. Among other emerging markets, he said Korea is in a corrective phase of an uptrend while China is in an intermediate downtrend.