A quick look at the FPI flow story for 2020
The chart above is suggestive in multiple ways. The above is a cumulative graph for year 2020 and the net FPI investment has been Rs1,53,189cr despite the heavy selling in March. In fact, if you just look at the current fiscal year from April 2020 onwards, FPIs have infused Rs2,07,425cr into Indian equities.
What is noteworthy is that 54% of the net FPI inflows of the current fiscal have come in the months of November and December. This is not even the full month of December and it could still get better from here. So, that is all about the FPI flows story. That brings us to the bigger question; where did all these money flow and were there any broad sectoral or thematic trends visible?
What was the theme FPIs were betting on?
Broadly, if you leave aside the micronarratives, the FPIs are betting on a revival in consumer demand to drive the growth in the economy. The chart below captures where a chunk of the FPI funds flowed into.
The broad theme ispredicated on revival in consumer demand. FPIs have learnt that for an economy with a population of 1.30 billion and per capital income just $2,000, there is a humongous opportunity for consumer stocks. Banks are not just a consumer story but they also represent the best proxy for the India story. After all, any bounce in consumer demand or capital investment revival has to be led by the banks.
That consumer driven approach of FPIs also explains why they have been betting on themes like consumer discretionary, consumer staples, NBFCs and insurance. All these sectors represent the best front-loaded bets on the revival of consumer demand. When the economy moves from -7.5% in FY21 to +10% in FY22, as the RBI has projected, we are looking at a massive impact on consumer demand. That is where FPIs are positioned.
The oil & gas preference is largely led by Reliance and, to a lesser extent,by dividend plays like ONGC and IOCL. After all, with Brent crude hovering around $50/bbl, the downside risk in oil stocks is limited. Auto buying could be a bet on consumer demand and mean reversion of auto holdings for FPIs. There is an interesting trend that one cannot really miss out. FPIs have not been too excited about IT and pharma. This could be partially due to their global business models and partially due to relatively rich valuations.
FPIs had some sell outs too
To be fair, you cannot expect very heavy selling in sectoral plays in a fiscal year when over Rs207,000crwas infused into equities. But there were some standard suspects. FPIs have been selling heavily into telecom sector. While Bharti has been on the buy list of most FPIs, there has been selling pressure on stocks like Indus Towers (formerly Bharti Infratel) and Vodafone Idea. However, we need to understand that RIL is classified as an oil & gas company. If due weightage is given to its telecom and digital franchise, the actual flow picture may look different.
Other than telecom, some select sectors like transport, coal, utilities and textiles have seen outflows during the year. But in numerical terms, the outflowsare quite small compared to the intensity of the inflows into Indian equities.
What do these FPI flows augur for 2021?
If you look at FPI flows historically, sequential flows have been tough to predict. However, the bottom line is that in the last 27 years since FIIs started investing in India, they have been net buyers in almost all the years except in 3-4 exceptional years. But, year 2021 will be unique for an entirely different reason. It will be the opportunity for the FPIs to invest in an economy that is turning around from -7.5% growth to +10% growth.
In short, there are two factors that could play in favour of Indian equities. Firstly, the massive growth turnaround is too salivating an opportunity for FPIs to let go. They have few reasons to sell and all the reasons to buy. Secondly, with bond yields low and inflation elevated through most of next year, the real yields on debt will stay unattractive. That could also make a case for FPIs to continue to remain positive on Indian equities in 2021!