Foreign portfolio investors (FPIs) turned net buyers in July for the first time in 2022, after 9 months of continued outflows. Since then the foreign investors remained enthusiastic about Indian equities in August as well. FPIs have infused ₹51,000 crore ($6.4 billion) in August so far amid softening of inflation in the US and the falling dollar index. This is the highest investment made by them since December 2020.
Nearly half of the foreign investor inflows went into banks, financials and healthcare sectors.
According to a report by brokerage house IIFL Alternative Research, FIIs invested around $1.6 billion in financials (including banks) in August, followed by $1.4 billion in FMCG, $1 billion in pharma and $0.47 billion in auto and auto components.
However, financials were on their sell list in July, when they turned positive for the first time in 9 months.
The report showed that the FPI inflow into banks and financials was the second highest since February 2021, when they bought shares worth $1.96 billion.
"Such a huge inflow comes after large outflows worth $6.38 billion in the last six months and $12.4 billion in one year," it added. The main reason behind the massive inflow is consistent improvement in banking credit growth since January 2022. Further, experts believe that despite the recent market rally, the valuations of baning and financial stocks are not very expensive and that they are still trading at a discount to their historical peaks.
As per the brokerage, at 5.6 percent, FPI allocation towards the auto sector is the highest since March 2019, the report further pointed out. Moreover, inflows in capital goods at 2.5 percent were the second highest since January 2021, noted IIFL. The brokerage also informed that allocation in capital goods rose for the fourth consecutive month.
Meanwhile, after an 11-month selling stake, foreign investors finally turned buyers in the information technology (IT) sector as well in August. The report stated that they bought IT shares worth $50 million during August.
The report noted that in the last six months, IT stocks witnessed selling worth $4.7 billion, whereas in the past one year, IT socks saw outflows worth $10.8 billion.
"IT witnessed buying, breaking an 11-month selling streak. In the last 6 months and 1 year, this sector had faced second highest outflows after financials," the IIFL report said.
Despite the positive flows, the weightage of IT stocks at 10.7 percent dropped for the fifth consecutive month and was the lowest in August since March 2018, added IIFL As per market analysts, IT stocks, have been under pressure on demand slowdown and margin impact-related worries.
“Despite underperforming Nifty in the first half of CY22 by a huge 19 percent, NSE IT has continued to underperform Nifty in July by 4 percent and by 6 percent in August. Yet IT stocks trade at 1 standard deviation above their 10-year averages, offering limited valuation comfort. We expect further cuts to FY23-24 EPS estimates, resulting in their continued underperformance. Hence, we reiterate our cautious stance on the IT sector with Infosys being our sole Buy,” Jefferies said in a note on Tuesday.
The report also highlighted that at 5.5 percent, FII allocation in power is the highest since January 2018 as they have been increasing the allocation in the sector in the last one year.
FPIs had been net sellers since October last year. Between October 2021 till June 2022, they sold a massive ₹2.46 lakh crore in the Indian equity markets.
Going ahead, most experts believe that foreign fund inflow is expected to improve in the emerging markets on account of fading concerns of rising inflation and tightening of monetary policy by central banks. Optimism that lower crude oil prices will help dampen inflationary pressure and prompt the Reserve Bank of India (RBI) to go slow in raising interest rates also added to the bullish sentiment, they said.