Foreign funds remain net sellers; adds to weakness in equity

Foreign funds continue to be net sellers in the market as about Rs 3,000 crore was pulled out so far in January adding to the weakness in equity.

After the huge outflow in 2018, analysts were expecting that there could be trend reversal in the new year.

However, data shows that foreign funds were net seller during most trading sessions in January.

Analysts were anticipating a recovery in inflows on the back of robust corporate earnings and resolution of the ongoing liquidity crisis.

According to experts main reason for foreign fund outflows last year was due to rise in US interest rates, global trade wars and the state elections.

NSDL data showed that Foreign Portfolio Investors (FPIs) sold Rs 80,919 crore worth of equities, debt and hybrid instruments in 2018, while the equity segment alone accounted for Rs 33,014 crore in outflows, the highest in a decade.

Foreign fund flows into domestic equities as a percentage of the country’s total market capitalisation dropped below 1 per cent in December 2018 compared with 3 per cent two years ago and FPI trading volume as a percentage of the total volume has fallen to 30 per cent from the 50 per cent in the past three years.

Gautam Chhaochharia, analyst, UBS Securities India said, “Benign liquidity has supported India’s premium valuations and increased local flows into the equity market.

“Although liquidity has started to normalise post the tight phase in H218, easy money of the past three years is unlikely to be back in a hurry. Historical returns have supported retail flows historically, and this too is now less of a support. Our UBS-Financial Conditions Index also suggests waning support for flows and returns.”

Strong buying by domestic institutional investors (DII) supported the market. On a net basis, foreign portfolio investors (FPIs) offloaded shares worth Rs 732.46 crore on Monday while DIIs were net buyers to the tune of Rs 527.49 crore. DIIs have poured nearly Rs 1,800 crore in domestic equity market in the past five trading sessions till January 14. On the other hand, FIIs offloaded shares worth Rs 867 crore during the same period.

Meanwhile, private  life  insurers’ individual NBPs grew 17 per cent YoY to Rs 5,100 crore in Dec-18 (FY19TD growth 15 per cent), recovering after a bleak Nov-18 where growth was just 2 per cent. Mutual  fund equity (ex. arbitrage and ETF) net inflows on the other hand declined to  a 30-month low of Rs 6,700 crore in Dec-18 that is  40.6 per cent below FY19TD monthly average of Rs 11,200 crore.

Madhukar Ladha, analyst, HDFC Securities said, “We believe this is an interesting time to track net inflows to these savings options, as Sebi has banned upfront commission payouts for MF sales by AMCs,  while life insurers continue to pay out heavily. We believe this tilts the scale in favour of the insurers, as we expect distributors will push insurance (ULIPs)  given the higher commissions and upfronting of payouts. In this context, Dec-18 seems to be a month where growth rates at life insurers (+17 per cent YoY, +54 per cent MoM) have overtaken asset managers (-74 per cent YoY, -23 per cent MoM).”

After two strong years of NBP growth of 26 per cent annually HDFC Securities expect NBP growth to moderate to 11-14 per cent YoY. Consequently, FY19E APE growth is expected at 8-10 per cent. Our top pick in the sector is SBI Life with target price of Rs 735 (+18.5 per cent). Our target price implies a FY20/21E Implied P/VNB of 21.2/16.6x.