London-based financial advisory firm Elara Capital believes that there is a confluence of factors that could prevent FII liquidity from returning to Indian markets anytime soon.
“Rather risk of further FII supply can be higher,” the firm said in a note.
“In the past, Indian markets have always underperformed EMs after big FII selling since they influenced the prices. However, this time India’s outperformance remains at historic high. This is also resulting in incremental foreign liquidity moving into other underperforming EMs (largely China).”
The global firm pointed out that this was the only time when despite such a large order of overseas investment outflows from equities, the relative allocation of FIIs in Indian markets remained at a record high due to buying from domestic Institutional Investors and retail players.
Foreign Institutional Investors have net sold Indian equities every single month since October 2022. FII net sales of stocks from October 2021 to May 2022 stand at a mind-boggling Rs 1.9 lakh crore, NSDL data showed.
GLOBAL ALARM BELLS
It is no secret that global factors are not exactly conducive for bulls to dominate stock markets at the current juncture. A host of central banks, including that of the world’s largest economy, have embarked on an aggressive monetary tightening cycle, implying tighter financial conditions the world over.
The ripples will be felt in India, especially from a valuations perspective, Elara Capital warned.
According to the global firm, the collapse in the Nasdaq has historically been a leading indicator of global markets getting into valuation de-rating mode. The risk is larger for expensive names whose valuations could take a hit even in the face of a small earnings disappointment.
“Indian markets can also get dragged down along with Nasdaq. This leg of correction from 18,200 was led by the Nasdaq. Big support for Nifty is at 13,000-13,500. This is the maximum acceptable damage in prices to keep the ongoing bull markets alive,” Elara Capital said.
The firm warned that since the upside acceleration in stock prices had been sharp, the retracements could be sharp too.
“Only a break below 13,500 can challenge the bigger structural trend for India.”
The headline Nifty and Sensex indices delivered returns of around 20 per cent in the previous year, outstripping many global markets.
“After the collapse in the most crowded theme of the decade (US growth/tech stocks), we could see liquidity turning broader and moving into other markets. This would be similar to what we saw in the 2000-2002 period, which was the last time the US growth/tech saw big collapse,” Elara Capital said.
“That laid the foundation of a big liquidity shift into EMs over the next few years. For Indian equities, this could be the phase of pain before bigger gains.”
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