Overseas investors’ behaviour has a story to tell

It remains to be seen how much of their selling is profitbooking or cutting India’s weight

The impact of the second Covid wave has led to several downgrades of growth prospects. The IMF says it will review its April 2021 forecast of 12.5 per cent GDP growth when it issues its July forecast. The IMF also noted that developments in India would have spill-over effects.

S&P Global has cut its forecast to 9.8 per cent GDP growth, from an earlier projection of 11 per cent. The advisory said the projections assume lower consumption will mean less hiring, lower wages, and a second hit to consumption. Credit Suisse has cut its forecast to 8.5-9 per cent and warned that this will delay the economy recovering its potential trend growth rate by an additional two or three years beyond 2022-23. This puts paid to the target of reaching a GDP of $5 trillion by FY25. That would require roughly 125 per cent growth in the next three financial years.

FPIS or foreign portfolio investors may have started responding to the second wave by cutting back on their India exposure. Overall, they have sold over ~16,500 crore of rupee equity between April 1 and May 6. However, this has not yet had much of an impact on the stock market.

The Nifty has moved between 14,867 (closing value on April 1) and 14,823 (May 7), which is hardly a change. In the same period, the Nifty 500 is up marginally, from 12,479 (April 1) to 12,563 and the Smallcap 250 is up, from 7,089 to 7,474 -- almost 5 per cent during this period. The Midcap 200 is also up from 8,047 to 8,107 — about 0.75 per cent.

One would characterise this as a market that is trading within a fairly narrow range, with small-caps outrunning large-caps. Domestic institutions have bought about ~13,500 crore in April and May combined (until May 7). The rest of the buying, which has balanced FPI sales, must have come from retail investors. That also gels with the fact that small-caps have outperformed since retail tends to back small-caps.

The earnings profile will definitely deteriorate in Q1, 2021-22 because of the second wave. As of now, the Nifty is trading at a P/E of about 32, which makes India among the most highly valued markets.

Looking at FPI exposure by sector, they have been net sellers in the following areas in the period April 15-30. FPIS have reduced exposure in automobiles, capital goods, FMCG, personal care, and software. They did increase exposure to metals and minerals during this phase and also to the health care sector. In May, FPIS seem to have trimmed exposure to cement and financial services. It remains to be seen how much of this is normal profit-booking in a market that has run up quite sharply and how much of this is a pullback in terms of reducing India weighting.