Selloff 2022: Foreign Portfolio Investors (REITs) or Fair Weather Friends (FWF)?

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Investment.

New Delhi, June 18 (IANS) The biggest rate hike of 75 basis points since 1994 by the US Federal Reserve is the latest flashpoint as global and Indian stock markets reeled from heavy selling pressure from overseas investors.

Indian and global markets also slumped on Thursday on fears of a recession after the US Fed hiked interest rates by 75 basis points, the biggest increase since 1994. In addition, the chairman of the Fed, Jerome Powell, signaled another big move (50-75 basis points) struggling to contain runaway inflation.

It sharply raised the interest rate target to 3.4% for 2022 and 3.8% for 2023, according to Motilal Oswal Financial Services.

Sorbh Gupta, fund manager, Equity, Quantum AMC, said in a note that the month of May saw REIT outflows of $5.17 billion. It was the worst month for REIT flows since REIT investments were allowed to invest in India in 1991.

“Interestingly, of the five “worst” FPI flow months, 4 have occurred this calendar year. Domestic institutional investors (mutual funds and insurance combined) were net buyers for May 2022 at $6.57 billion,” he added.

Equity investors who have invested in stock markets for the past two or three years have experienced generally positive returns and a rapid recovery from each correction. Current volatility and slow markets will test their patience, Gupta said.

The S&P BSE SENDEX fell (-) 2.16% on a total return basis in the month of May 2022.

It underperformed developed market indices such as the S&P 500 (0.18%) and the Dow Jones Industrial Average (0.32%). S&P BSE SENDEX also underperformed the MSCI Emerging Market Index (0.46%). The broader market was weaker, the S&P BSE Midcap Index was down (-)5.5% for the month and the S&P BSE Small Cap Index was down 7.8%.

The electrical and metalworking sectors, which have taken center stage in recent months, were the biggest losers, falling 11.3% and 15.5%, respectively. The BSE automotive index was the only sector index in the green to rise by 4.9%.

Yes Bank said in a note that the higher current account deficit will not be fully covered by capital inflows in FY23. India has already recorded FII outflows of 30.5 billion dollars since October 2021 and $9.4 billion since April 2022, coming from both debt and equity.

“While we expect FDI flows to remain strong (albeit weaker than in the prior year) and short-term trade finance to remain buoyant, overall capital account flows are expected to be approximately $55 billion in FY23, compared to $94 billion in FY22,” the note reads.

Risks of a lower BoP balance cannot be ruled out in the event of larger outflows than currently anticipated.

According to the IIF, capital flows to emerging markets, including India, are expected to slow to $972 billion this year from $1.68 trillion in 2021, a 42% year-on-year decline.

Excluding China, net capital flows are expected to fall to $645 billion from $1 trillion last year. Underlying weak fundamentals in emerging economies due to rising oil prices, high current account (CAD) deficit, high public debt-to-GDP ratio and limited fiscal space to support growth Growth is likely to limit the ability to attract a lot of capital to the region, Yes Bank said.

In FY 2021-22 alone, FIIs sold their investments worth around Rs 1.22 lakh crore compared to FY 2020-21 where they invested around Rs 2.67 lakh crore. There are several reasons why FIIs have started withdrawing their investments from Indian markets since the last financial year, Angel One said in a note.

The Russian-Ukrainian war took center stage in the last week of February. The geopolitical uncertainties and complexities associated with this war have created fear among foreign investors. This resulted in the exits of the FII in India.

India is the third largest consumer of crude oil and is also the third largest importer of crude oil across the world. The heat of the Russian-Ukrainian war had a massive impact on the global economy as crude oil prices soared. This surge in crude prices made the Indian stock market volatile and led to higher transportation costs and increased inflation. This impact on the economy and imports influenced the sentiments of foreign investors which prompted them to withdraw their money from the Indian stock market, Angel One said in a note.

Indian markets are aligned with the United States and other global markets, which means that if other markets start to fall, Indian markets will also be affected. Some of the major reasons affecting the US economy recently include higher inflation, an expected rise in the interest rate to control inflation, and rising inflation has led to a sharp rise in US bond yields.

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