FIIs have been on a selling spree in the Indian stock market in October. In the first thirteen trading days of October FIIs had sold equity for about Rs 83,000 crores. The monetary and fiscal measures announced by the Chinese authorities to stimulate the weak Chinese economy raised hopes of a Chinese rebound. This hope triggered huge fund flows to the Chinese stocks, which had become very cheap. A rational response from the FIIs was to sell in the expensive markets and buy the cheap Chinese stocks. Indian market with elevated valuations became a top choice for FIIs to sell. Since foreigners cannot buy stocks listed in Shanghai Stock Exchange in China, they buy the Chinese H stocks listed in Hong Kong. The ‘Chinese hope trade’ triggered a dramatic turnaround in the Shanghai and Hong Kong markets. The Hong Kong stock index Hang Seng shot up by a whopping 35 percent in less than a month.
The ‘Sell India, Buy China’ trade impacted sentiments in India and Nifty corrected by about 6 percent from the peak. At high valuations, the market is vulnerable to corrections. From elevated valuations, reversion to mean happens, even though the timing of the reversion is not predictable. If FIIs continue to sell, the market can correct some more. Along with the negative sentiments created by the FII selling, some negative news on the economy and some sectors like automobiles triggered selling in India.
A matter of some concern is the emerging consensus of the low earnings growth estimated for FY25. FY24 earnings growth was impressive at 26 percent. For FY 25 this is estimated to come down to about 10 percent. A rising market and falling earnings are not compatible. Therefore, some market weakness may persist in the short term. FY26 earnings growth is likely to rebound and, therefore, once clarity emerges on this earnings rebound, the market can bounce back.
The ‘Sell India, Buy China’ trade is likely to be a short-term tactical trade. The Chinese economy suffers from structural issues, which cannot be addressed through monetary and fiscal stimulus. China is facing multiple headwinds to demand and growth. The real estate market accounts for 27 percent of China’s GDP and this market is in serious crisis with humongous over supply. Bloomberg Economics reported in May 2024 that “China has the equivalent of 60 million unsold apartments, which will take four years to sell without government aid.” Apart from the crisis in the property market, China is facing the challenge of declining population and its adverse impact on demand and GDP growth. China’s debt to GDP at 280 percent is alarming and the government debt to GDP ratio at 84 percent preempts a sustainable fiscal stimulus. With multiple headwinds being faced by the economy, a sustained recovery in GDP and earnings growth would be a tall order for China. In brief, the ‘Sell India, Buy China’ trade is likely to be a short-term tactical trade triggered by hope and cheap valuations. On the other hand, the India Growth Story is structural and has superior long-term prospects. But elevated valuations can trigger a reversion to mean.
FII selling opens up opportunities for long-term investors. Of the total FII AUM (Assets Under Custody) in India of $940 billion, 28 percent is financials and, therefore, this large segment has been facing the brunt of FII selling, making their valuations attractive. For long-term investors, this presents an opportunity.
