Why FPI selloff intensified in December to the highest since March 2020

Foreign portfolio investors, who have been driving the Indian equities for more than a decade, have sold more shares this month as they took money off the table in the second consecutive year of strong returns.

FPIs have sold Indian shares worth over $2.3 billion (Rs 17,677 crore) so far this month, taking the tally to the highest since the coronavirus-induced panic selling in March 2020.

The quantum of outflow—some of it is also apparent in other Asian and emerging markets (EM)—has accelerated in recent months as investors look to maximise and protect their gains amid rising concerns of monetary tightening measures by central banks across the world and threats of a new coronavirus variant. 

Indian equities were ranked the best-performing markets across the world, with year-to-date returns of over 25%, before the selling started. In line with this trend, FPIs remained net buyers worth $9 billion in the first nine months of this year before they pressed the sell button in September this year.

In the last three months, FPIs have cumulatively offloaded Indian shares worth $4.95 billion.

Andrew Holland, CEO, Avendus Capital Alternate Strategies, a hedge fund, said that threat of the new Omicron variant and likelihood of rising interest rates globally have caused a lot of damage to Indian equities.

“A lot of damage has been done over the past week or so. We are down 10% or more from the highs. But all the concerns are not going to go away from us. That is what we are going to grapple with throughout the first quarter (of 2022),” Holland said.

Asian and EM scenario

Some of the Asian and EM economies have also witnessed selling pressure, with the Japanese markets witnessing over $13.3 billion worth of outflows this month, as per Bloomberg data.

South Africa (down $1.2 billion), Malaysia, Vietnam, and Taiwan also witnessed fund outflows, while other markets such as Thailand, South Korea, Qatar and Dubai began to see inflows decelerate.

According to Citigroup analysts, Asian equity market performance showed great divergence in 2021 with India and Taiwan significantly outperformed the rest, with very robust earnings recovery. 

“Since policy and vaccine supply drove relative performance in 2021, we suspect they could contribute to some reversal in 2022. As most of the world heads toward a mid-cycle recovery, Asian earnings per share growth is likely to normalize to between 8% and 10% in 2022, after spiking 43% in 2021,” said Jim O’Donnell, head of Citi Global Wealth, in a 2022 outlook report to clients.

“We expect markets with stretched valuations to first feel the downward pressure from earnings revisions, such as India. In China’s case, we remain slightly overweight despite the local economic slowdown. This is because tech and internet companies have very heavy weightings in the market and the worst of the regulatory tightening is now likely behind these sectors,” O’Donnell noted.

So, where’s the money flowing?

According to Bloomberg data, a lot of money has flowed toward bonds and fixed-income instruments, especially inflation-linked and short-term debt.

Japan saw more than $39 billion worth of bond purchases in December, taking the quarter-to-date tally to over $45 billion and $118.7 billion since the start of 2021.

South Korean bonds have also attracted investor interest with over $7.2 billion of instruments purchased this month, taking the tally to over $104.9 billion for the year.

“The biggest issue is about interest rates and that obviously has been having an impact on risk assets. But until we get a clearer picture about whether the interest rate hikes are going, the markets are going to have a two-sided view,” said Holland. “So, there is nothing wrong with people taking some money off the table at this time of the year when we have had such a good run in the market.”