Motilal Oswal sees potential for positive FII flows after post-budget sell-off – here’s why

On Budget Day, July 23, foreign institutional investors (FIIs) sold Indian stocks worth ₹2,975.31 crore, according to NSE data. This was followed by another ₹5,130.90 crore in FII outflows on July 24. Despite these sell-offs driven by concerns over budget announcements such as the rise in capital gains taxes and STT in F&O trading, brokerage house Motilal Oswal Private Wealth (MOPW) believes that FIIs could soon return to the Indian equity markets.

Motilal Oswal noted that the Indian equity market has shown impressive performance over the last three years, driven by stellar growth in corporate profits and robust inflows from Domestic Institutional Investors (DIIs). Although FIIs have been net sellers during this period, leading to a decadal low in their ownership of Indian equities before the domestic elections, there are multiple reasons for them to reconsider their allocation to India.

Economically, India is expected to be the fastest-growing major economy this year, with a positive GDP growth outlook for the decade. India's external account has strengthened significantly post-CY22, aided by the increasing share of oil imports from Eurasia at lower costs compared to the Middle East. This stability in the currency (INR) is another positive factor.

Corporate India's balance sheets also remain healthy, with a declining debt-to-equity ratio and improved ability to service interest costs. Positive trends in credit growth, capacity utilisation, and capex further bolster this outlook.

Moreover, the recent rally in Indian stocks has been more broad-based compared to the US market, where a few top companies dominated performance. Strong corporate performance and price movements across market capitalisations in India could attract FIIs.

"Within the top 500 listed stocks in the US, the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) have dominated both in terms of price performance and earnings growth relative to the rest. Conversely, the domestic market has witnessed strong corporate performance and price movements across market capitalisations. These factors could be viewed positively by FIIs," noted MOSL.

It's also worth noting that Indian stock markets are no longer significantly impacted by FII flows due to the financialisation of savings and increased retail participation. DIIs are likely to cushion any erratic FII behavior going forward.

In terms of valuations, Motilal Oswal suggests a staggered investment approach over 3-6 months for large-cap and multi-cap strategies, and over 6-12 months for select mid and small-cap strategies, given that largecaps are fairly valued while mid and smallcaps are relatively expensive.

While the Union Budget 2024 has brought about some concerns leading to FII outflows, Motilal Oswal sees potential for positive net FII flows going forward. The brokerage highlights India’s strong economic fundamentals, healthy corporate balance sheets, and a broad-based market rally as factors that could drive a positive reevaluation by FIIs. Despite current market volatility, the outlook for Indian equities remains optimistic, with domestic investors expected to continue supporting the market.