The current weakness in equity markets may not have run its full course, for foreign institutional investors seem to be stepping on their panic sell button as their confidence in Indian equities fades.
The foreign brokerage firms which are getting increasingly bearish on India believe that the bottom for equity markets is still a long way to go as FII selling has just started and there may be more to come.
The foreign investors on Tuesday sold equities worth Rs1,424.31 crore (as per provisional exchange data) in the cash segment after having sold equities worth Rs1,156 crore in previous two sessions.
Jyotivardhan Jaipuria, head of Research, Bank of America Merrill Lynch (India), says investor sentiment on India has turned negative as they seem genuinely concerned about the risk of the policy mistake in order to curb currency volatility.
“However, this sentiments is still some distance away from the extreme bearishness of the past. Despite the bearishness of foreign investors over the past few quarters, FII ownership of Indian markets continues to be at an 8-year high. Any policy mistake could likely result in accelerated selling by the FIIs which could bring down the markets rapidly,” he said in a note on Monday.
The 5.89% fall in equity markets and nearly 2.9% fall in currency over the last three sessions has meant that FII returns have been negative 8.66% in the last three sessions.
Jaipuria believes that most of their proprietary indicators show that tactically it’s better to wait for a further correction or some signs of stability in the currency before buying India. The rupee threat seems apparent for FIIs.
While Indian markets may have just fallen 6% since the start of the year, foreigners who have pumped in huge money in equity markets so far this year have witnessed negative returns of 18.3% so far this calendar year on account of a sharp rupee slide.
Morgan Stanley too believes that bottom is still far off and it’s better to wait. “No doubt, some of the sentiment indicators we track appear to be reaching oversold territory and at some point in the next few Nifty points and a few days, the market is likely to rally.
However, until the fundamental construct remains the way it is – we think this will be a rally to sell, not buy,” Ridham Desai, Sheela Rathi, Utkarsh Khandelwal, analysts at Morgan Stanley, wrote in a note on Tuesday.
According to Morgan Stanley, momentum indicators suggest the market needs to fall a lot more before they can conclude that it has capitulated. “The 200 DMA indicator, for example, suggests a further 15% downside. FII flows indicator too has not yet turned totally negative. FII Flows have slowed from their May-13 peak.
Flows had peaked at $31 billion, or 2.6% of market cap – usually a level that is bad for the market. We are now down to 2.1%. Flows need to be at least at 0% on a 12-month trailing month basis for markets to bottom. If this has to happen by December-13, it implies an outflow of $12.5 billion,” wrote the trio at Morgan Stanley.