FPIs clamour to Invest in India oriented sectors

The month of August 2022 has been a positive month, or rather an extremely positive month for FPI flows. Between October 2021 and June 2022, FPIs took out nearly $33 billion from Indian equities. July 2022 was a relatively better month with net flows of $618 million. However, the real kicker came in August 2022 as the net flows of FPIs rose 10-fold to $6.44 billion. It was one of the best months in terms of FPI flows in recent memory and largely mitigates the impact of the persistent FPI selling for 9 months till June 2022.

However, the million dollar question, what is it that the FPIs are actually buying in Indian equities. Is it just an index level India exposure or are they being more sector specific? Are there are any sectoral or thematic trends that are emerging in the colour of the FPI flows. Broadly, the theme appears to be that the FPIs are positive on the India driven domestic stories while they are going light on the global stories that have greater dependence on global spends or global industrial demand. Let us first look at the colour of FPI buying.

The colour of FPI buying in 2022

While FPIs may have turned aggressive net buyers only in August 2022, the trend of buying into India specific sectors has been visible for the last few months. Broadly, the foreign portfolio investors are positive on sectors that are driven by the demand dynamics of the domestic economy. Some of the key preferred sectors for FPIs in 2022 have been consumer discretionary, financials, industrials, FMCG and telecom. Here is what has driven the FPI demand in each of these specific sectors.

    • Consumer discretionary sectors are expected to gain from higher levels of income and a sharp fall in inflation. The affordability index has been improving.

    • Financials have always been the best proxy for the India consumer story. FPIs have not only liked banks but have preferred insurance companies and NBFCs too.

    • FMCG has been an obvious choice for the FPIs. With falling inflation, margins are operating improving and top line is robust with substantial pricing power.

    • Industrials have been in demand of late as a early bet on the revival of the capital investment cycle, which has almost been quiescent for over 10 years now.

    • Lastly, telecom is seen as a play not only on consumer demand but also on the growing digitization of the Indian economy and parallel revenue streams

Let us now turn to what the FPIs sold out of.

The colour of FPI selling in 2022

FPI selling was visible  in sectors that were more vulnerable to global triggers and the local markets had little to do with the dynamics of the sector. Here are some sectors where the FPIs were selling in 2022. 

    • The oil & gas sector has traditionally been a function of how the global crude prices pan out. That is something Indian companies have little control over. Crude prices, gross refining margins are all determined at a global level.

    • The Indian IT industry has been the focus of selling by FPIs in 2022. The reasons are not far to seek. The IT industry derives about 80% of its revenues from the US, Europe and UK. All these 3 regions are very vulnerable to a slowdown and a consequent cut in tech spending.

    • Finally, there is metals, where there has been a lot of FPI selling. It is not just about the China factor, but also the fact that metals have rallied sharply in the last 1 year and most of the enthusiasm of the commodity cycle is already in the price. With China tightening COVID restrictions, metals has been a focus of selling by FPIs.