Foreign investors reduce stake in over 70% companies in Sensex in Q3; FIIs are booking profits: Experts

FIIs have remained net sellers in the Indian markets for the quarter ended December 2021 pulling out more than Rs 1 lakh cr in the cash segment of Indian equity markets in the October-December period.

Experts blame it on the US Federal Reserve jitters as well as profit booking after a steep rally seen in 2021 which led to a selloff from foreign investors.

“FIIs have been pulling out money from equities globally, including Indian equities, primarily on account of the Fed’s tapering decision, rising US Treasury yield to new highs, and record-high level of inflation,” Mitul Shah, Head of Research of Reliance Securities, said.

“Moreover, the recent premium valuation of Indian equities makes risk-reward unfavorable for investors and gives discomfort leading to profit booking. These are the key reasons behind it,” he said.

Tracking the trend, FIIs have pared their stake in 23 out of 30 or 76 per cent of the companies in the S&P BSE Sensex on a sequential basis.

Companies like Tata Steel, HCL Technologies, ICICI Bank, IndusInd Bank, and Axis Bank saw over a 1 per cent fall in FIIs stake, data from Trendlyne showed.

Experts see it as routine profit-taking and investors should not see this as some kind of warning sign and turn cautious on these companies.

“FIIs selling over Rs 1 lakh crore is profit booking taking place and is not any kind of panic signal. FIIs have sold certain weightages in certain stocks, but if you check the data, they have also increased stake in similar companies over the last 4 to 6 quarters,” Yuvraj Ashok Thakker, Managing Director, BP Wealth, said.

“FIIs have been booking profits in the latest quarter in line with the global markets. Looking at FIIs selling only in isolation does not necessarily mean that the stocks will remain weak in the near term,” he said.

What should investors do?

One of the major reasons for the selling by foreign investors is the potential rapid pace of tapering by the US Federal Reserve in 2022 in light of rising inflation, and a similar move could be expected from India’s Reserve Bank of India (RBI) later in the year.

If central bankers cap liquidity flow it will have an impact on equity markets across the globe because abundance liquidity helped markets to climb all walls of worries.

“It is well-known that liquidity provided by various central banks, especially the US Fed, helped global equity markets to perform well and now when central banks are reducing their easy monetary policies and increasing interest rates amid inflation concerns, we can expect some outflows by FIIs, specifically from the ETF route that generally follows momentum,” Santosh Meena, Head of Research, Swastika Investmart Ltd, said.

“FIIs have a major stake in financials and then in IT, therefore, we are seeing major selling in this area, but I believe Banking especially corporate facing banks will outperform from here,” he said.

There is strong earnings growth momentum which is likely to continue for the next couple of quarters and there is valuation comfort as well. 

Meena further added that ICICI Bank is our top pick following SBI and AXIS Bank in the banking space while HCL Tech and Tata Steel also look attractive after a recent correction.

What should investors track?

Tracking what foreign investors are doing is a good short term to filter stocks; however, experts suggest investors track the trend for at least 4 quarters as well as other qualitative and quantitative indicators before making the decision.

“Investors should always look at the business and management quality of the company before analyzing the financials and valuation of the company,” says Shah of Reliance Securities.

“Post this primary analysis, the company’s return ratios and D/E play an important role during such type of pandemic led slowdown of the economy as leverage is a very important parameter for the sustenance of business during such a challenging business environment,” he said.

Under control D/E ratio gives comfort to investors during the period of economic turmoil.

In India, 60-70% of FIIs' money comes through the ETF route that chases momentum therefore we see high volatility in the short term, suggest experts.

“Investors should have a long-term view where they should focus on Management quality, earning quality, and business quality. Business cycle and valuations are other important parameters that should be tracked while investing,” says Meena of Swastika Investmart Ltd.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)