Foreign portfolio investors (FPIs) have net sold shares of $11.7 billion (over 1.1 lakh crore) in March – the highest ever. But they are not done yet. As of Wednesday. they continue to hold high short positions – 85.5% — in index futures, up from 75% a month ago, according to data from Bloomberg.
Since the beginning of the crisis in the West Asia, their short positions have been hovering over 85%, indicating the likelihood of a further sell off if the matter doesn’t cool off.
Two weeks ago, they had held over 90% short positions, an instance which was first seen three years ago and repeated in over 50 trading sessions since then.
Valuation Paradox
“FPIs are likely to wait for a durable resolution to the geopolitical tensions in West Asia before decisively increasing their India allocations,” George Thomas, fund manager at Quantum Asset Management Company, said.
He added that they are likely to tread cautiously in the current environment even though valuations have become compelling in many pockets and long-term return potential looks good.
As per the National Stock Exchange data, the Nifty 50’s 12-month trailing price-to-earnings (PE) ratio is 20.39x, lower than the five-year average of 23.7x. India’s valuation has eased from its historical peak over the last two years. However, experts believe that it continues to be one of the most expensive markets on the global front, especially among Asian countries.
Energy & Earnings
Meanwhile the challenges due to energy prices remaining higher for longer continue. Goldman Sachs downgraded its rating on Indian equities to ‘marketweight’ from overweight. “India stands out as more vulnerable among key Asia markets to potential energy shortages, given it is a lower per capita income economy with high energy imports,” it said in a report. It also cut the Nifty 50’s 12-month target level to 25,900 points from 29,300 points, indicating a 11% rise from the current level.
The risk of earnings downgrades in case of a prolonged war and the consequent pressure on crude oil prices and the rupee could make FPIs retain their bearish stance on domestic equities, they said. For FY27, some experts believe earnings growth to be 14-15%, but this could be trimmed to 11-12% if the war prolongs, they noted. However, this will still be better than the 5-6% growth recorded at least over the last six quarters.
“The persistent selling pressure in large caps through index futures as well as cash markets indicates foreign investors’ cautious approach,” the head of equity of a foreign bank’s Indian broking arm said. FPI outflows will likely continue as long as there is pressure on energy prices and the rupee, the expert added.
The benchmark Nifty 50 index is down 7% since the war broke out at the end of last month.
