FIIs: FIIs selling spree unlikely to end soon: Covid-19 & what else is making them hit sell on D-Street

Mumbai: The Indian equity market’s outlook in the near-term does not look rosy with global markets getting hammered by the coronavirus scare. Social unrest on the domestic front, coupled with a slowdown in economic growth is also keeping investors at bay, say foreign investors (FIIs) who have been on a selling spree of riskier assets.

Disappointing earnings growth and stretched valuations also leave little room for value hunting, they added.

“The markets by any standards, even in India, are very expensive. Not all stocks; oil stocks are very depressed. But in general, the so-called blue chips or growth stocks are very expensive based on price-to-earnings ratio, especially, on a price-to-sales ratio,” said Marc Faber, the author of Gloom, Boom & Doom Report

“The market capitalisation of the world’s stock markets as a percentage of the global economy is very high. So this is not just a correction. The coronavirus is just a catalyst to the decline,” Faber told ET Now.

Faber asserted that the deeper reason for this decline is that markets around the world were overbought, expensive and disregarded a global economy that had begun to slow down in 2019.

FIIs have been net sellers of Indian shares for four straight sessions to Thursday. They have offloaded a net of Rs 9,833.56 crore in these four sessions. In the near-term the scenario is unlikely to change drastically.

“As per anecdotal evidence, we see most fund managers, including us, increasing dry gun-powder to manage the spike in volatility. We would refrain from value hunting in the Indian equity market for now, because of poor management of domestic issues and the COVID-19 led disruptions,” said Sanjay Guglani, CIO of Singapore-based Silverdale Capital.

The scenario was no different for emerging markets at large.

“Looking a bit further than a few weeks, EM equities continue to look vulnerable, due to the weak global growth picture and the slump in global trade that is likely to last longer due to the virus,” said Maarten-Jan Bakkum, Senior Emerging Markets Strategist at Hague-based NN Investment Partners (NNIP). The Dutch firm manages 276 billion euros of wealth for its clients.

The key thing acting in favour of India is that the economy is not as export-focused as its peers in the emerging markets space. However, slowing economic growth and disappointing earnings growth has been a significant deterrent for foreign investors to add more of Indian equities in their kitty.

For at least eight years now, analysts and investors have been waiting for the much-awaited earnings recovery. While green shoots did show up on occasions, they did not last long enough to turn into a structural recovery, and the December quarter was no different.

“Indian equities are less vulnerable to these considerations than the EM average, due to the relatively closed Indian economy. This does not necessarily mean that India will outperform. The social unrest and the still disappointing growth numbers are likely to keep sentiment troubled. But in the current complicated global environment, we do not want to sell India, and have not done so recently,” Bakkum said in an email response.

The recent communal violence in the capital city of Delhi, which killed 39 citizens has also raised concerns with foreign investors.

“Year-to-date, the Indian market has outperformed global emerging markets. At first sight, this does not suggest that the market is bombed out and that easy value can be found,” he added.

A few were of the opinion that value could emerge in pockets for Indian markets in the current broader meltdown.

“Our view on EM remains constructive: The EM middle class is growing fast and throughout fundamental bottom-up investment process we continue to see opportunities in areas such as financial services, particularly pensions, life insurance, and more sophisticated financial savings products, creating opportunities in the insurance and banking sectors,” said Ghadir Cooper, Global Head of Equities, at Barings, which manages more than $338 billion of assets.

“At this point in time, EM markets look attractively valued relative to their history and their developed market counterparts. This is also the case in India,” she said in an email from London.

Cooper said she will follow the bottom-up investment process and look to identify attractive entry points in companies where the long term earnings delivery potential remains intact despite the near-term challenges posed by this outbreak.

“This will remain the case for all markets including India where over the medium to long run, we believe corporate earnings should drive equity prices. We view the recent correction and any potential further volatility as attractive entry points for the opportunities in the areas listed above,” Cooper added.