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4 Reasons Why Foreign Investors Are Selling Indian Stocks4 Reasons Why FIIs Are Selling Indian Stocks
Foreign investors love to invest in India. They can find stocks across categories, small and large, that are fundamentally strong and are growing fast.
Foreign institutional investor (FIIs) have been a driving force behind the rise of the stock market.
Historically, whenever Indian stocks crashed or rose sharply, FIIs were usually behind it.
But that is not the case anymore. The Indian retail investor has made his presence felt. Via direct investments of mutual funds, retail investors have reduced the influence of FIIs in the market.
But that doesn't mean they don't have any influence. They certainly do. And when they buy or sell in large quantities, the market cannot move in the opposite direction until they are done.
For example, did you know that FIIs have been net sellers to the tune of Rs 381 billion (bn) since the start of the year?
And this came on the back of Rs 1,214 trillion (tn) of net sales in the year 2022.
That's right! FIIs are on a selling spree. They are dumping Indian stocks.
In fact, they have been unenthusiastic about India for quite a while now. In the boom year of 2021, FIIs were modest net buyers to the tune of Rs 257.5 bn.
Mind you, this was for the full year 2021. That works out to just a little over Rs 2 bn in net buying per month in a raging bull market. It was the Indian retail investor that drove the market higher.
So this means foreigners did not buy in the covid bull market. Then they have been selling relentlessly after the market peaked in 2021. And they have picked up the intensity of selling this year.
Is it any wonder the Indian stock market has been struggling to scale new highs since October 2021?
It's the FIIs' fault.
But why? What are the reasons for this relentless selling?
Well, we can think of four main reasons. Let's examine them one at a time…
During covid, they eased liquidity and cut rates to record low levels (even zero in some cases). This was to ensure that their economies did not freeze up during the lockdowns.
They did not pay attention to the risks of high inflation because during covid, that seemed like a remote possibility.
But things soon changed. You could say, the economic situation flipped 180 degrees. As soon as people started to get back to their regular lives, inflation hit hard.
Central banks are raising interest rates to try and get ahead of inflation before it gets out of hand. They have been at it since. There is no indication that interest rates will come down soon. Thus the stock market has to get used to high interest rates.
This is bad news for emerging markets like India. Whenever, interest rates in developed countries rise, money flows back to these economies as they are perceived to be ‘safer'.
This has been going on since the second half of 2021 and it doesn't look like ending any time soon.
From 73 to a dollar in September 2021, the rupee fell to 83 in October 2022. That's a decline of 12% in 13 months.
This is a big loss to any foreigner holding Indian assets. If the asset did not rise in value by at least 12% during this time, he would face a loss.
During this period Indian stock markets were falling. Thus FIIs faced a double loss…on the stocks and on the currency.
Thus they have been selling shares in India and other emerging markets and taking the funds back to the US and other developed markets.
This is a very real possibility. And as they say, when the US sneezes, the world catches a cold. The market thinks if the US is in a recession, there could be a global recession. This fear has been driving markets lower.
And this is aside from all the geo-political tensions with Taiwan and the US.
But 2023 could be different. China is reopening for business.
By that we mean pre-covid business as usual. This will give a big boost to its economy. Thus its stock market, beaten down as it is, will look very attractive to foreign investors.
This partly explains why we have seen a recent acceleration in FII selling in India. A part of the funds are going to China along with the US.
This will be a source of pressure on the Indian market in the short term.
With that, let's take a quick look at 5 well-known Indian companies in which FIIs have sold significant stake over the last one year.
#1 Tech Mahindra
This IT stock has been under pressure since December 2021. And the reason is not hard to find.
At the end of the December 2021 quarter, FIIs held 35.36% stake in the firm. This stake has been falling steadily.
In the December 2022 quarter, FII holding came down to 27.95%. While the company is strong fundamentally, the stock has been caught up in the US tech stocks sell-off. The stock is down 455 from its all-time high.
#2 Jubilant Foodworks
The franchisee of Dominos Pizza in India has been one of the top performing stocks since covid. During the lockdowns, the company's business boomed that's to the massive surge in food deliveries.
The stock peaked along with the rest of the market back in October 2021. The stock didn't fall a lot immediately. But from 2022 onwards, it has been a huge disappointment for investors. From peak to trough, the stock is down 52%.
The stock hit its 52-week low last week. Despite the big correction, the stock still trades at a prohibitively high PE ratio of 70.
The selling by FIIs largely explains the weakness in the stock. It was an FII favourite.
In the December 2021 quarter FIIs held 39.77% stale in the firm. In the December 2022 quarter, this had come down to 26.77%.
#3 Navin Fluorine
The company is one of India's leading chemical firms. It was also one of the biggest beneficiaries of the China plus one trend in the global chemical sector.
As businesses moved out of China, over the last few years, Navin Fluorine has thrived. The company's sales have risen from just under Rs 10 bn in FY19 to Rs 14.5 bn in FY22. Its net profit has risen from just under Rs 1.5 bn to Rs 2.6 bn, over the same period.
Unsurprisingly, the stock has soared from Rs 600 in July 2019 to Rs 4,800 in September 2022.
Even covid did not cause the stock the crash. Its price has risen even in 2022 when the rest of the market fell.
The strong conviction of FIIs and domestic mutual funds has been the driving force behind the stock.
This is one stock in which FIIs would have made a lot of profit with a simple buy and hold strategy, despite the fall in the rupee.
However, FIIs have been booking profits. From a holding of 25.25% in December 2021, their stake now stands at 19.19%.
#4 Indian Energy Exchange
This was a big multibagger stock during the bull market of 2020-21.
In the covid crash, the stock fell to Rs 43. It then soared to Rs 300 by December 2021. Strong buying from FIIs certainly helped the stock in its rise.
But as they say, what goes up must come down. FIIs have been selling the stock over the last year. And the price has been hammered. The stock is down 60% from its all-time high.
In December 2021 FIIs held 31% stake in the firm. By December 2022, this had declined steeply to 15.5%.
#5 Balrampur Chini Mills
The stock of India's largest sugar firm rose 6 times post the covid crash. This was due to rising sugar prices and the government's push for ethanol blending in auto fuels.
It also had very strong support from FIIs during this time.
But things have changed now. The company's future growth and margins no longer look as rosy as they did last year. And FIIs are not known for their patience.
From a shareholding of 20.37% in December 2021, their shareholding fell to 13.86% in the December 2022 quarter.
Conclusion
FIIs are well-known drivers of specific stocks as well as the entire market.
Their dominance over the benchmark indices may have reduced over the last few years due to the rise of the Indian retail investor.
But they still hold sway over the stocks in which they have a big shareholding. If they sell continuously, for many quarters, these stocks are likely to languish.
Investors should keep this in mind when considering stocks with high FII holding.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
Foreign investors love to invest in India. They can find stocks across categories, small and large, that are fundamentally strong and are growing fast.
Foreign institutional investor (FIIs) have been a driving force behind the rise of the stock market.
Historically, whenever Indian stocks crashed or rose sharply, FIIs were usually behind it.
But that is not the case anymore. The Indian retail investor has made his presence felt. Via direct investments of mutual funds, retail investors have reduced the influence of FIIs in the market.
But that doesn't mean they don't have any influence. They certainly do. And when they buy or sell in large quantities, the market cannot move in the opposite direction until they are done.
For example, did you know that FIIs have been net sellers to the tune of Rs 381 billion (bn) since the start of the year?
And this came on the back of Rs 1,214 trillion (tn) of net sales in the year 2022.
That's right! FIIs are on a selling spree. They are dumping Indian stocks.
In fact, they have been unenthusiastic about India for quite a while now. In the boom year of 2021, FIIs were modest net buyers to the tune of Rs 257.5 bn.
Mind you, this was for the full year 2021. That works out to just a little over Rs 2 bn in net buying per month in a raging bull market. It was the Indian retail investor that drove the market higher.
So this means foreigners did not buy in the covid bull market. Then they have been selling relentlessly after the market peaked in 2021. And they have picked up the intensity of selling this year.
Is it any wonder the Indian stock market has been struggling to scale new highs since October 2021?
It's the FIIs' fault.
But why? What are the reasons for this relentless selling?
Well, we can think of four main reasons. Let's examine them one at a time…
- Rising Interest Rates
During covid, they eased liquidity and cut rates to record low levels (even zero in some cases). This was to ensure that their economies did not freeze up during the lockdowns.
They did not pay attention to the risks of high inflation because during covid, that seemed like a remote possibility.
But things soon changed. You could say, the economic situation flipped 180 degrees. As soon as people started to get back to their regular lives, inflation hit hard.
Central banks are raising interest rates to try and get ahead of inflation before it gets out of hand. They have been at it since. There is no indication that interest rates will come down soon. Thus the stock market has to get used to high interest rates.
This is bad news for emerging markets like India. Whenever, interest rates in developed countries rise, money flows back to these economies as they are perceived to be ‘safer'.
This has been going on since the second half of 2021 and it doesn't look like ending any time soon.
- Depreciating Rupee
From 73 to a dollar in September 2021, the rupee fell to 83 in October 2022. That's a decline of 12% in 13 months.
This is a big loss to any foreigner holding Indian assets. If the asset did not rise in value by at least 12% during this time, he would face a loss.
During this period Indian stock markets were falling. Thus FIIs faced a double loss…on the stocks and on the currency.
Thus they have been selling shares in India and other emerging markets and taking the funds back to the US and other developed markets.
- Flight to Safety Due to Fears of a Recession
This is a very real possibility. And as they say, when the US sneezes, the world catches a cold. The market thinks if the US is in a recession, there could be a global recession. This fear has been driving markets lower.
- The Reopening of China
And this is aside from all the geo-political tensions with Taiwan and the US.
But 2023 could be different. China is reopening for business.
By that we mean pre-covid business as usual. This will give a big boost to its economy. Thus its stock market, beaten down as it is, will look very attractive to foreign investors.
This partly explains why we have seen a recent acceleration in FII selling in India. A part of the funds are going to China along with the US.
This will be a source of pressure on the Indian market in the short term.
With that, let's take a quick look at 5 well-known Indian companies in which FIIs have sold significant stake over the last one year.
#1 Tech Mahindra
This IT stock has been under pressure since December 2021. And the reason is not hard to find.
At the end of the December 2021 quarter, FIIs held 35.36% stake in the firm. This stake has been falling steadily.
In the December 2022 quarter, FII holding came down to 27.95%. While the company is strong fundamentally, the stock has been caught up in the US tech stocks sell-off. The stock is down 455 from its all-time high.
#2 Jubilant Foodworks
The franchisee of Dominos Pizza in India has been one of the top performing stocks since covid. During the lockdowns, the company's business boomed that's to the massive surge in food deliveries.
The stock peaked along with the rest of the market back in October 2021. The stock didn't fall a lot immediately. But from 2022 onwards, it has been a huge disappointment for investors. From peak to trough, the stock is down 52%.
The stock hit its 52-week low last week. Despite the big correction, the stock still trades at a prohibitively high PE ratio of 70.
The selling by FIIs largely explains the weakness in the stock. It was an FII favourite.
In the December 2021 quarter FIIs held 39.77% stale in the firm. In the December 2022 quarter, this had come down to 26.77%.
#3 Navin Fluorine
The company is one of India's leading chemical firms. It was also one of the biggest beneficiaries of the China plus one trend in the global chemical sector.
As businesses moved out of China, over the last few years, Navin Fluorine has thrived. The company's sales have risen from just under Rs 10 bn in FY19 to Rs 14.5 bn in FY22. Its net profit has risen from just under Rs 1.5 bn to Rs 2.6 bn, over the same period.
Unsurprisingly, the stock has soared from Rs 600 in July 2019 to Rs 4,800 in September 2022.
Even covid did not cause the stock the crash. Its price has risen even in 2022 when the rest of the market fell.
The strong conviction of FIIs and domestic mutual funds has been the driving force behind the stock.
This is one stock in which FIIs would have made a lot of profit with a simple buy and hold strategy, despite the fall in the rupee.
However, FIIs have been booking profits. From a holding of 25.25% in December 2021, their stake now stands at 19.19%.
#4 Indian Energy Exchange
This was a big multibagger stock during the bull market of 2020-21.
In the covid crash, the stock fell to Rs 43. It then soared to Rs 300 by December 2021. Strong buying from FIIs certainly helped the stock in its rise.
But as they say, what goes up must come down. FIIs have been selling the stock over the last year. And the price has been hammered. The stock is down 60% from its all-time high.
In December 2021 FIIs held 31% stake in the firm. By December 2022, this had declined steeply to 15.5%.
#5 Balrampur Chini Mills
The stock of India's largest sugar firm rose 6 times post the covid crash. This was due to rising sugar prices and the government's push for ethanol blending in auto fuels.
It also had very strong support from FIIs during this time.
But things have changed now. The company's future growth and margins no longer look as rosy as they did last year. And FIIs are not known for their patience.
From a shareholding of 20.37% in December 2021, their shareholding fell to 13.86% in the December 2022 quarter.
Conclusion
FIIs are well-known drivers of specific stocks as well as the entire market.
Their dominance over the benchmark indices may have reduced over the last few years due to the rise of the Indian retail investor.
But they still hold sway over the stocks in which they have a big shareholding. If they sell continuously, for many quarters, these stocks are likely to languish.
Investors should keep this in mind when considering stocks with high FII holding.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com