With nearly $10 billion worth of investments being pulled out, October has emerged as the worst month on record for Foreign Institutional Investors (FIIs) withdrawing from India’s stock market.
The outflow has surpassed the previous high of $7.9 billion seen during the March 2020 COVID-19 market crash and has been attributed to a combination of factors, including a shift in global investor sentiment towards China and concerns about overvaluation in Indian equities.
However, despite the sell-off, the Nifty is down by only 4% this month, significantly less than the 23% decline during the March 2020 crash, when the domestic market was in turmoil, partly aided by Domestic Institutional Investors who have invested over Rs 74,200 crore so far in October.
Much like during the 2020 market crash, Domestic Institutional Investors (DIIs), primarily mutual funds, have acted as a counterbalance to the heavy selling by FIIs.
This follows a broader trend in 2024, where DIIs have made record investments of Rs 4 lakh crore in the Indian market.
Retail investors, unlike in previous market downturns, have shown resilience, refraining from panic selling even as foreign funds exit.
‘Buy China, Sell India’ trade drives FII sentiment…
One of the main drivers of the October FII outflow is the growing “Buy China, Sell India” trade.
Investors are increasingly optimistic about China’s economic prospects, with the Hang Seng Index up 14% and the Shanghai Composite Index rising 22% in the last month.
This contrasts with the 4% decline in the Nifty, which reflects concerns about India’s market valuations and corporate earnings performance.
“Investors expect that China will ultimately embark on meaningful stimuli that will not only underwrite ’24 growth but extend into ’25-26,” said Viktor Shvets, a strategist at Macquarie.
He added that investors believe the Chinese government is now focused on the economy and may de-emphasize political and geopolitical issues.
…but China is good for traders, not long-term investors, say economists
The investment community however remains divided on whether China’s recovery is sustainable. Noted economist and investment strategist Ed Yardeni advised caution regarding the “Buy China, Sell India” trade. Yardeni told Invezz,
I wouldn’t recommend selling India and buying China unless, again, it might be a good trade, but it’s not a good long-term investment. And India’s had a tremendous bull market, so it’s not exactly cheap. But I would stay invested in India.
Similarly, Chris Wood of Jefferies, who recently increased his weightage in China at the expense of India, reflects a growing sentiment of tactical shifts among global fund managers.
While some investors are bottom-fishing in Chinese markets in anticipation of stimulus, others view the move as a temporary trade rather than a sign of a structural turnaround.
Macquarie, too cautioned that this is more of a trading opportunity than a long-term investment strategy.
“It is quite possible that further announcements might propel China’s equities, even as structural issues fester. But, this is mostly a trading, not an investment call, which still heavily favours India,” the firm said in a report last week.
Overvaluation concerns loom over India
The sell-off by FIIs isn’t just about China. Concerns over India’s market valuations, which have soared following a prolonged bull run, are weighing on investor sentiment.
Analysts warn that Indian markets are trading at historically high valuations, which appear overly optimistic given the current economic backdrop.
Factors such as slowing growth, persistent inflation, high taxes, and elevated interest rates have raised doubts about the sustainability of these valuations.
Ajay Bagga, a market veteran, noted that investor tolerance for missing earnings is minimal in such an environment.
“When markets are at such elevated levels, there is very little tolerance for missing earnings and for bad news,” he said, adding that the rising dollar index, which is now above 103, is further pressuring emerging markets like India.
Weak corporate earnings and macroeconomic challenges
Indian corporate earnings for the most recent quarter have been lackluster across various sectors, adding to the concerns of foreign investors.
Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, pointed out that speculative capital had been flowing into India, with FIIs remaining net buyers as recently as September.
However, the narrative has since shifted, and investors are now turning their attention to Chinese markets, which offer more attractive short- to medium-term valuations.
“With elections ahead in the US, it is believed that the trade war with China will become more aggressive, and the same factors will continue to be in force whoever comes to power,” said Narender Singh, smallcase Manager and Founder at Growth Investing.
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