FPI Outflow In Financials Offsets Defensive Stocks' Gains Amid August Global Rout

India's financial stocks saw an outflow of nearly $1.8 billion in the first half of August, while overseas funds chased safe haven stocks to cushion the global turmoil that took a toll on the Indian markets.

The country's financial services stocks have seen hot money rush in and out during the year with the latest outflow of $1.76 billion from Aug. 1 to Aug. 15, according to data from National Securities Depository Ltd. While foreign institutions sold over a billion dollars each in four months this year, they bought over a billion in June.

The month began with the global turmoil unleashed by the unwinding of Yen carry trade, combined with weak economic prints in the US which raised concerns of aggressive rate cuts by the US Federal Reserve. Amid this, global funds turned cautious to turn aggressive on the domestic defensive stocks in healthcare, consumer space, and power among others.

The unwinding of carry trade in the Japanese yen led to its appreciation against the US dollar, which disrupted global markets. The Bank of Japan, in line with market expectations, hiked its benchmark interest rate to 0.25% from 0.0–0.1% in early August. Expectations of further hikes by the central bank have resulted in a sell-off of the yen-funded carry trade.

India's healthcare stocks saw the most inflow at $412 million, while the fast-moving consumer goods stocks saw an inflow of $213 million during the first half. Power companies attracted $139 million followed by inflows in telecommunications, textiles and utilities stocks.

The FPI outflows witnessed in August were primarily driven by a combination of global and domestic factors, according to Vipul Bhowar, director of listed investments, Waterfield Advisors. "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."

Mixed quarterly earnings and relatively higher valuations have also made Indian equities less attractive, he said.

While foreign institutions have sold nearly Rs 30,000 crore of Indian equities in the first half of August, domestic investors have bought stocks worth nearly Rs 31,500 crore, according to provisional NSE data.

Domestic flows have been so strong that they did not allow the markets to become cheaper even while the volatility in FPI flows was seen, Vinod Karki, head equity-strategy at ICICI Securities Ltd., told NDTV Profit. "We can see some situations that markets have run ahead of what the fundamentals suggest."

The primary market issues are at comparatively lower valuations, while in the secondary market the valuations continue to remain high, said VK Vijayakumar, chief investment strategist, Geojit Financial Services Ltd. "So FPIs are buying when securities are available at fair valuations and selling when the valuations get stretched in the secondary market."

This trend of FIIs selling is likely to continue, since India is the most expensive market in the world now and move the money to cheaper markets, Vijayakumar said.