For a long time, foreign portfolio investors or FPIs have been the drivers of market sentiments. Markets have gravitated towards the direction of FPI flows and also the sectors that FPIs are buying and selling into. What are the major sectors that FPIs bought into in Apr-21 and the sectors they sold out of?
How FPIs infused funds into Indian equities over the years
Foreign Portfolio investors have been active investors in Indian equity and debt markets but for now we shall only look at the equity flow components of the FPIs
A quick reading tells you that since the turn of the century, FPIs have infused $206 billion in the form of net inflows into Indian equities. These are the net flows (purchases – sales) in Indian equities. The red bars represent the 3 years when the FPIs were net sellers in Indian equities. Actually, FY22 data is based on the first 35 days of FY22 only, so this data could change. FY09 saw a major $10 billion outflow due to the impact of the global financial crisis. The outflow in FY16 was on account of the taper worries of the US Federal Reserve.
The four green bars represent the years that saw positive FPI inflows of more than $20 billion. While FY10, FY11 and FY13 have been good years, it is FY21 that takes the honours with $37 billion of net inflows into equities. Before going into sectoral trends in Apr-21 here is a quick look at how FPI money is currently invested in India.
Where is FPI money invested in India?
That is a fairly simple question. The largest exposure would be to financial services, but how large is it. Here is a quick sectoral comparison of FPI assets invested.
Data Source: NSDL
In terms of sectoral mix, few clear trends emerge. The financial services AUC at $179 billion accounts for 33% of the total AUC of FPIs. That approximately syncs with the weightage of financial services in the Nifty too. What is surprising is that the AUC of pharma and capital goods is almost at par with autos, although their weight in the Nifty is much lower. Clearly, the last one year has seen a lot of FPI buying in under-priced sectors like pharmaceuticals, healthcare, capital goods and in PSU utilities. The big new entrant is the insurance space where allocations and AUC could grow substantially once LIC also lists.
Which sectors did FPIs buy and sell in April 2021?
In the month of April 2021, there was a clear shift out of cyclicals and into the more defensive sectors. The chart below captures the gist of the FPI action in Apr-21.
Let us look at the sectors where the FPIs were net buyers. Home care and personal care is an obvious beneficiary of the pandemic and most FPIs have been betting that, despite rich valuations, these stock offer the best defence against the demand vagaries. Information Technology is another sector where the FPIs see the merits of investing in a global business model. After all, most global economies are recovering a lot faster than India. Also, the pandemic and the WFH model have opened up new avenues for IT companies. Contrary to popular expectations, the IT spending may increase in this year. FPIs were also buyers in realty and utilities but that appears to be more of value picking in low priced value stocks.
The selling side of the FPIs was dominated by rate sensitives like financials and autos. The FPIs are building in an outside possibility of a rate hike in the US, which could put pressure on the RBI. Of course, financials are also the sector where FPIs are most heavily invested. In metals and oil, it appears to be a concern over valuations after the recent rally. If you look at metals, the top-5 metal companies have all rallied more than 250% in the last 1 year. That raises the risk of valuation froth. Then there are stocks like Reliance where the rally has been frenetic despite a high base. Even in retailing, there have been concerns over steep valuations.
Overall, for the FPIs, April 2021 may look like a sedate month in terms of flows. However, the shift is clearly towards defensives and global franchises. That seems to be the message coming from FPIs.