US-based funds pulling out money from India at fastest pace since Jan 2022: Report

India, which stood out as the hottest market for foreign investments in 2023, is now showing signs of a rapid reversal. In its latest report, domestic brokerage firm Elara Capital noted that foreign funds have begun pulling money out of India-dedicated funds for the first time since March 2023, with the fastest pace of outflows seen since the Russia-Ukraine crisis in 2022.

The brokerage highlighted that, over the last five weeks, a total of $575 million has exited India-dedicated funds. Of this, $360 million was withdrawn from large-cap funds, while $215 million was redeemed from mid-cap funds.

"Post the US election, we saw a 7-week large inflow of $33.5 billion in US funds. Flows into US funds have been strong over the past five weeks going into the election. Post the election results, the US and Europe are two regions where foreign flows are strong. Foreign-domiciled U. funds saw a 12-week large inflow of $5.7 billion. In Europe, foreign flows were strong in the UK and Switzerland." said Elara Capital. 

The brokerage stated that US-domiciled funds have started pulling out money from India at the fastest pace since January 2022. In the last five weeks, US-domiciled funds have pulled out $385 million from India, which is 70% of total India outflows.

Ireland funds have pulled out $240 million. Interestingly, Japanese funds have still not started taking out money, however, inflows have stopped for the first time since August 2023.

"India-dedicated foreign flows as a percentage of free float market cap have started dropping; this is visible for the first time in this cycle, which began post-COVID. A similar reversal in April '10, June '15, and January '18 had been a leading indicator of weaker market trends going ahead," said the brokerage.

It also noted that foreign fund flows into China turned negative over the past two weeks, with $2 billion in outflows after $19.2 billion in inflows during the prior five weeks. Out of the $2 billion outflows from China, $800 million was from US-based funds. A similar trend is visible in Japan, where US funds have pulled out $320 million in two weeks (out of total outflows of $720 million).

FII selling pressure mirrors 2008 crisis levels

Elara Capital also highlighted rising concerns about the intensity of foreign institutional investors (FII) selling in India. According to the brokerage, current levels of FII outflows are comparable to the 2008 financial crisis period.

Elara Capital identified several months in which FII selling, as a percentage of market cap, was similarly intense or worse than what is being observed now. Since 2000, there have been 22 months where India experienced comparable or stronger FII outflows, with seven of these instances occurring during the 2008 global financial crisis.

Elara Capital’s analysis suggests that historically, when foreign institutional investors engage in intense selling, the market tends to recover modestly in the short term. Following such high-intensity selling, the average returns over the next month and three months have been +1.8% and +4.7%, respectively, with the median returns at +1.8% over one month and +2.4% over three months.

Additionally, markets have posted positive returns 60% of the time during the one- and three-month periods after these intense selling phases, though temporary declines often occur. In certain instances, such as January 2000, August 2007, August 2015, October 2018, and January 2022, significant FII selling was followed by prolonged bearish market trends, indicating that such sell-offs can sometimes signal the onset of multi-year market downturns.

The brokerage also pointed out instances, such as in May 2004, October 2005, May 2006, May 2010, November 2016, and March 2020, when significant selling followed major events, ultimately marking a market bottom.

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