A major factor that pulled the market down by around 10 percent from the peak has been the relentless selling by FIIs. FIIs sold stocks worth Rs. 14,475 crore in October. The sell figure exploded to Rs. 33,799 crore in November and in December, up to 17th, the FII sell figure is Rs. 25 252 crore. (Source: NSDL)
Why are the FIIs on a selling spree?
Will they continue to sell?
What will be the impact of this relentless selling on markets?
Is there an opportunity for investors?
These are the relevant questions.
FII selling is rational
In early November many leading foreign brokerages had downgraded India from overweight to neutral. The downgrade was on valuation concerns. At 17300 Nifty was trading at around 20 times FY2023 earnings. India’s PE is 60 percent higher than EM peers and Price to Book is 100 percent higher than EM peers. Market cap to GDP, too, is excessive at around 120 percent. It is this overvaluation concern that triggered the downgrade and the consequent sustained selling. This can be considered a rational response from ‘smart money.’
What are FIIs selling?
If we look at the portfolio construct of FIIs, some data are significant. As on 31st November 2021, financial services segment with AUC (Assets Under Custody) of Rs. 14,64,427 crores was by far the largest holding of FIIs. Within the financial services, banking with AUC of Rs. 8,18,524 crore, constitute the largest segment. High quality financials like the HDFC twins are among the large holdings of FIIs. In November alone FIIs sold banking stocks worth Rs. 15,526 crore. Though banking has been an underperformer in 2021, FIIs are sitting on huge profits in these stocks, which they accumulated over the last many years. When an investor feels that the markets are overvalued and it is desirable to book profits, it is normal to sell from its largest holding and book profits. From this perspective, FII selling in financial services particularly banking, is rational. FIIs sold IT stocks too (Rs. 2,792 crore) in November.
What are FIIs buying?
FIIs have been buying in the primary market, which has been hot this year. Investment in the new-age tech companies like Zomato, Nykaa and Policy Bazar, which listed on lofty valuations, gave the FIIs who were anchor investors in these IPOs, huge profits. So, they decided to ride the momentum in the IPO market even though the valuations of these new-age companies were hard to justify. In November, when FIIs sold equity worth Rs. 33,799 crore in the secondary market, they bought for Rs. 27,854 crore in the primary market.
Then, the Paytm disaster happened.
As anchor investors some marquee funds invested heavily in Paytm IPO. FIIs like BlackRock, Canada Pension Plan Investment Board, Sovereign Wealth Fund of the Government of Singapore, Abu Dhabi Investment Authority etc. invested Rs. 8,235 crore in the IPO of Paytm. The anchor investors have lost heavily since the IPO was listed at a discount and crashed by more than 30 percent since. The institutions that are remaining invested in the stock, as most of them are, have incurred huge losses. FIIs are regarded as smart money managers. But this strategy of selling performing bluechips and investing the proceeds in new-age companies at hard-to-justify valuations is anything but smart.
Opportunity for retail investors
Since valuations continue to be high even after the recent correction, FIIs may continue to sell from their largest holding of financial services. But, at some point their selling will subside; they may even turn buyers. Among the EMs, India has the best growth rebound story with the potential of sharp rebound in corporate earnings in the next 3 years. DIIs are flush with funds and retail investors are now a force to reckon with. The recovery in the economy and the consequent capex, has improved the demand for credit, which is likely to clock low double-digit growth in 2022. IT is in a multi-year up cycle, thanks to rising digitization. In brief, banking and IT present good buying opportunities for long-term investors since “in the long-run market is a slave of earnings”.