The election this year has come with much nail-biting. It’s not just political parties that are having the jitters – investors are also facing sharp market swings and volatility. The Nifty VIX rose to a 15-month high of 22.3 points as of Tuesday, while the Nifty 50 has been range-bound since the start of the polling season.

Foreign institutional investors in particular have grown wary of the volatility. They are at their most pessimistic level since 2012, shorting Indian stocks significantly, and have withdrawn around $3.5 billion from Indian equities in May alone. For now, foreign outflows have not dented valuations much, as inflows from domestic institutions have jumped.

Rising bond yields in the US have also contributed to FII withdrawal. Bond yields are up as the timing of likely rate cuts by the US Fed keeps getting postponed, shifting from June-July to September-October. And despite tensions between the US and China, cheaper valuations of Chinese and Hong Kong equities (currently trading at 10 PE) have been tempting foreign investors.

Mihir Vora, Chief Investment Officer of Trust Mutual Fund, says, “ FII outflows are on account of election uncertainty. India in the longer term will see FII inflows, as it is one of the fastest growing countries among large economies”. 

Historically, FIIs have returned to Indian markets post elections. Will this year be different?

In this week’s Analyticks:

• FIIs exit stocks: How is the exodus impacting Indian markets? 
• Screener: Stocks where FII/FPIs are decreasing shareholding, with falling stock prices over the past month

Let’s get into it.

Election-led volatility, rising US bond yields trigger FII outflows

Volatility – a good measure of risk in the market – has risen significantly over the past month for India. But this is not the first time an election has driven the Nifty VIX up. The volatility index shot up during the 2014 election (a change election), to 38 points. In 2019, when the BJP won reelection, it rose to 29 points. Comparatively, the current rise of the Nifty VIX is on the lower side. 

But foreign investors hate uncertainty, and net outflows are likely to persist until the results are announced. If a single party wins, FIIs might return quickly to Indian equities.

Nifty VIX on the lower side so far, compared to the past two general elections

The strengthening US dollar has also fuelled FII outflows since a depreciating rupee eats into investor gains. Another reason for the outflow has been rising bond yields in the US. 

Sticky inflation and a strong American job market have put the US Fed in a tight spot as far as cutting interest rates is concerned. Rate cuts are now expected only in September, and the expected rate cut size has gone down from 90 bps at the start of 2024 to around 44 bps now. As a result, US treasury yields shot up from 3.8% at the start of 2024 to 4.7% by the end of April. The rising yield has attracted foreign investors.

Historically, Indian indices fall with a rise in US treasury bond yields, due to FII outflows. Recent DII inflows have buffered the fall, as domestic institutions invested Rs 2,50,903 crores from April 2023 to April 2024.

Rising US bond yields have triggered FII selling

Largecaps impacted by FII outflow, DIIs protect the fall

Since the start of 2024, FIIs have withdrawn nearly Rs 84,318 crore worth of equity from the Indian market. In the same period, DIIs invested around Rs 1,52,620 crore.

DIIs sustain Indian markets amid FII outflows in the past 12 months

The Nifty 50 has risen 3.3% from the start of 2024, while Nifty Midcap 100 and Nifty Smallcap 100 have gained 11.5% and 11% respectively. FII money has mainly been in largecap and midcap stocks, while DIIs have invested in midcap and smallcap.

As a result, the FII outflow from largecaps has been cushioned only a bit by DIIs. The midcap and smallcap rallies have been backed by DII inflows, despite concerns about their expensive valuations.

Telecommunication and consumer services sectors get maximum inflows, while FMCG and financial services see an exodus.

The telecom services sector saw the highest inflows from FIIs in 2024. The inflows were driven by Vodafone Idea’s FPO. The Vodafone issue saw FIIs buying 65% (Rs 11,700 crore) of the Rs 18,000 crore FPO.  The sector also saw FII investments in Bharti Airtel, which has gained significant market share in the past year, even as it raised overall tariff rates.

The capital goods (general industrial) sector saw investments in the defence industries. The defence industry was aided by large orders from the government – Indian defence firms won orders of more than $7 billion in FY24. Capital goods firms involved in infrastructure and real estate also saw increased volumes, due to higher election spending by the government and an uptick in real estate activity.

The telecommunication sector has led FPI inflows since January 2024

The financial services sector on the other hand, saw the highest selling in 2024. Most of the selling came in private banks and NBFCs, which have faced liquidity concerns and stiff competition from public sector banks. HDFC Bank – usually an FII favourite – saw the biggest exodus. HDFC Bank’s margins are under pressure, while merger woes continue.  

The FMCG sector also saw pressure as rural consumption slowed. The premiumization of products led to lower offtake in price-sensitive rural geography. However, higher consumption in urban areas has offset this a bit.

FIIs may choose India over China in the long run

Chinese stocks are now at at an attractive valuation compared to India. The government stimulus in China (around $138 billion) and the recent pick-up in industrial production have driven foreign inflows up. But the economic woes in the country and the rising threat of a US-China trade war may dent enthusiasm for the Chinese market in the longer term.

The International Monetary Fund (IMF) has guided India’s GDP growth of 6.8% for 2024, which is the highest among emerging economies. In comparison, China is expected to slow down to 4.6% GDP growth in 2024, from 5.2% in 2023. India’s inflation, currently at 4.8%, is also predicted to decline post-monsoons due to an expected fall in vegetable prices. 

While most emerging economies are struggling with price rises, slowdowns and geo-political tensions, India has so far not seen a major dent in growth. Increased tariffs on Chinese goods from the US and EU have impacted its growth prospects, and India is being seen by the world as a good alternative. 

In this scenario, current FII outflows are not a big worry. DIIs have been actively investing without any signs of slowing down. Foreign investors are expected to return in two phases, first, post-election, and then after the Fed starts rate cuts in the second half of 2024. Until then, DIIs will run the show.

Screener: FII/FPI decreasing shareholding QoQ with falling stock prices over the past month

Banking and finance stocks see highest FII outflows in Q4FY24

As the shareholding data for the final quarter of FY24 has come out, we take a look at stocks that saw a decline in their foreign institutional investor (FII) holdings during the quarter. This screener shows stocks where FII decreased their stake QoQ, where share prices declined over the past month.

The screener is dominated by stocks from the banking & finance, software & services, textiles, apparels & accessories and diversified consumer services sectors. Major stocks that appear in the screener are Aster DM Healthcare, Route Mobile, Kalyan Jewellers, PVR INOX, HDFC Bank, Star Health and Allied Insurance, Indus Towers and Indiabulls Housing Finance.

Aster DM Healthcare’s FII holding contracted the most by 7.5 percentage points in Q4FY24, while its stock price also plunged by 30.8% over the past month. The fall in stock price is mainly due to the company giving out a special dividend of Rs 118 per share on April 23.  Olympus Capital Asia Investments was the largest seller in the healthcare stock with a sale of an 8.9% stake in the company. The sold shares were picked up by mutual funds like Nippon Life India Trustee Ltd-A/C Nippon India Small Cap Fund (2.1% stake) and Franklin India Smaller Companies Fund (0.6% stake), and retail investors (1% stake).

FIIs sold a 5% stake in PVR INOX in Q4FY24, the stock has also fallen 5.3% over the past month. Funds like Plenty Private Equity Fund I and Multiples Private Equity Fund II LLP, among others sold a total of 2.3% stake in the movies & entertainment company. The sold stake was picked up by mutual funds like Nippon Life India Trustee Ltd-A/C Nippon India Mul (1.5% stake), HDFC Trustee Company Ltd. A/C Hdfc Capital Builder (3.8% stake and ICICI Prudential Multicap Fund (1.4% stake). 

You can find more screeners here.