FPI selling intensifies in financial sector; shift from high-valuation stocks to defensives

Foreign portfolio investors (FPI) were net sellers in the Indian stock market during the first fortnight of August 2024, with a marked preference for defensive sector stocks over financial stocks. FPIs net sold Indian equities worth ₹18,824 crore from August 1 to August 15, primarily divesting from the financial services, metals and mining, construction materials, and automobile sectors.

This comes after FPIs infused a total of ₹32,365 crore, or $3.87 billion, into Indian equities in the month of July, marking the second-highest monthly inflows in 2024.

The financial services sector was the most affected, with FPIs offloading ₹14,790 crore worth of stocks during August 1-15, following a sell-off of ₹7,648 crore in July, according to data from the National Securities Depository Limited (NSDL).

The metals and mining sector also experienced significant outflows, with FPIs withdrawing ₹2,668 crore in the first fortnight of August, after recording inflows of ₹7,310 crore in July.

The construction materials sector saw FPI outflows of ₹2,036 crore, while the automobile and auto components sector, along with capital goods stocks, suffered FPI selling worth ₹1,628 crore and ₹1,089 crore, respectively, from August 1 to August 15, NSDL data showed.

“The FPI outflows witnessed on August 24 were primarily driven by a combination of global and domestic factors. Globally, concerns about the unwinding of the Yen carry trade, potential global recession, slowing economic growth, and ongoing geopolitical conflicts led to market volatility and risk aversion. Domestically, after being net buyers in June and July, some FPIs might have chosen to book profits following a strong rally in previous quarters,” said Vipul Bhowar, Director Listed Investments, Waterfield Advisors.

Additionally, mixed quarterly earnings and relatively higher valuations have made Indian equities less attractive, he noted.

“Despite these factors, India’s strong economic performance, including GDP growth, reduced fiscal deficit, manageable current account deficit, and strong sector growth and industrial production, continues to attract many FPIs, indicating that FPI flows into India should persist,” Bhowar said.

FPI Buying

Conversely, FPIs maintained a net buying position in defensive sectors such as healthcare and Fast-Moving Consumer Goods (FMCG). The healthcare sector attracted the highest FPI inflows, totaling ₹3,462 crore. This was followed by the consumer services sector with ₹2,196 crore in inflows, and the FMCG sector, which saw FPI investments of ₹1,785 crore.

Additionally, FPIs bought ₹1,169 crore worth of stocks in the power sector, recovering from a substantial sell-off of ₹3,796 crore in July.

“From a macro perspective, India is enjoying the best growth-inflation dynamics globally while the corporate profit cycle continues to expand, thereby making stocks expensive. Expensive valuations and rise in global market risk will likely keep FPI flows volatile in the short term. It is preventing a melt-up in Indian stocks while the underlying fundamentals remain strong, which in our view, is positive for the market,” said Vinod Karki of ICICI Securities.

FPI Trend

Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services noted that a significant trend in FPI flows recently, which has become pronounced in August, is the sustained selling by FPIs through the exchange while continuing to invest through the ‘primary market & others’ category.

“This difference in FPI behaviour is due to the differences in valuations. The primary market issues are at comparatively lower valuations while in the secondary market the valuations continue to remain high. So FPIs are buying when securities are available at fair valuations and selling when the valuations get stretched in the secondary market,” Vijayakumar said.

He expects this trend to continue since India is the most expensive market in the world now and it is rational for FPIs to sell here and move the money to cheaper markets.

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