The cumulative chart tells you that in the first 12 trading sessions of November, FPIs pumped in Rs41,210cr into Indian equities. Of course, during this period FPIs have continued to be net sellers in debt but we shall look at that point separately. The million dollar question is; what exactly is driving this frenetic pace of FPI flows into Indian equities?
Joe Biden means less risk for Emerging Markets
If there was one singular trigger for the surge in FPI flows, it has been the election of Joe Biden as the next President of the US. Most global investors had been uncomfortable with the highly combative approach adopted by Trump, especially with respect to China. In fact, the aggressive stand Trump had adopted with respect to China was a key reason for the negative sentiments surrounding EMs.
Most of the EMs across Asia are economically very dependent on China for their global trade and capital flows. A slowdown in China means a slowdown across EMs. It also raised the prospects of currency wars, which is not something that would please the FPIs. With Biden expected to adopt a more rational approach towards China, FPIs are re-rating their EM risk perception. Obviously, India has been a key beneficiary of this risk-on trend.
COVID is history and Vaccine is close by
Realistically, the viral affliction may linger for much longer but its ability to impact global economies and businesses has sharply reduced. India has been one of the few countries that saw production across sectors recoup to pre-COVID levels. The data points like core sector growth, IIP growth and PMI are clearly hinting at output getting back to pre-COVID levels in most sectors.
While there is no guarantee on when the COVID vaccine will be launched, there are reasons for investors to be enthused. Currently, outside of China and Russia, there are 3 major players at an advanced stage of clinical trials for the vaccine. The list includes Moderna, Pfizer plus BionTech and AstraZeneca plus Oxford. Even the WHO has conceded that the vaccine could be a reality by the middle of 2021 and that gives a great hope for thickly populated nations like India that future productivity losses will be curtailed.
Q2 has been a revelation for macros and for corporates
Let us look at the quarterly results for the Sep-20 period. For the list of companies that reported results, sales are down by 6% but net profits are up by 150%. What is more important is that gross profits are up by over 10%, hinting that companies have worked hard to align their cost structures in line with lower output. The benefits of this exercise would be more evident in the coming quarters.
It is one thing to say that FPIs infused Rs41,210 crore in the first 18 days of November. For a realistic picture, you must put it in context. FPIs infused Rs35,566cr in the first 7 months of the fiscal. So the net FPI infusion in 18 days of November has been 16% more than the total money infused by FPIs in the Apr-Oct period. The sharp shift has been about Q2 results and the confidence that output is finally getting back to normal levels.
Equity is hot, because debt is not
Global equity markets have recovered as debt is looking increasingly non-remunerative. Globally, more than 15% of the debt is yielding negative returns in nominal terms. What about the scene in India? The 10-year bonds are quoting at 5.88% and retail inflation at 7.6% means; investors run the risk of negative real returns. Most FPIs look at Indian equity as a much better play on the potential economic recovery compared to bonds. The negative real returns on Indian bonds has strengthened the FPI case to invest in Indian equities.
Finally, we cannot ignore the passive MSCI story
Passive flows from ETFs and index funds have accounted for a chunk of the influential FPI flows into India. With public shareholding increasing, MSCI will be increasing the weight of India in the MSCI-EM index effective December 2020. That would result in inflows of $2.8-$3.2 billion into Indian equities. If you add up the preparatory buying, the actual impact could be a lot more. To be fair, that has driven a good amount of FPI demand for Indian equities in the recent past. But a more credible story of economic recovery and better corporate results have helped along the way.
What needs to be appreciated is that the Joe Biden election, Bihar outcome and Stimulus 3.0 provided the potent triggers for FPIs to re-rate India positively. For now, the euphoria continues!