Overseas investors turn net buyers in October

Foreign portfolio investors (FPIs) have net-turned buyers of Indian equities in October. So far this month, they have been net buyers to the tune of Rs 1,922 crore. On Wednesday, they had pumped in Rs 6,800 crore (over a billion dollars), the biggest single-day inflow since February. They followed it up with another Rs 1,700 crore worth of investment in domestic stocks on Thursday. The strong buying was after the government announced Rs 2.11 lakh-crore bank recapitalisation plan and Rs 7 lakh crore of investment in the roads sector. The announcement—made on Tuesday after market close—was taken positively by investors with shares in the bank, construction and public sector undertaking (PSU) space witnessing sharp gains. Until Tuesday, FPIs were net sellers of around Rs 6,500 crore for this month.

“Indian equities are rising on the comfort that the near-term growth outlook may be stabilising on the back of encouraging high-frequency data over the past two months while there is a spike in longer-term optimism due to the series of announcements made by the government to support growth,” said ICICI Securities in a note.

Overseas investors have been huge sellers since the start of August on concerns of a slowdown in the domestic economy and global risk-off triggered by US Federal Reserve’s decision to trim its balance sheet. Between August 1 and October 24, FPIs had pulled out Rs 28,330 crore ($4.5 billion) from the domestic market. The selling tally has now reduced to Rs 20,000 crore.

“Last week, saw a bit of a catch up buying by FPIs following the government’s surprise stimulus announcement. They have been continuously taking money off the table since August. The sharp rally in several stocks especially PSU banks caught them off guard,” said an official with a foreign brokerage.

Meanwhile, mutual funds (MF) have pumped in close Rs 8,300 crore in October. Since August, they have been net buyers to the tune of Rs 43,670 crore, providing critical support to the markets during the FPI sell-off.

On a year to date basis, MFs have invested around Rs 95,000 crore in domestic stocks thanks to robust inflows into equity schemes. Till September, equity MFs had garnered more than Rs 1 lakh crore as inflows into equity-oriented schemes.

FPIs to have been net buyers this year, however, their net investment is Rs 38,300 crore—about a third of MFs.

Sensex has gained 6.34 per cent in October and is on course to post its biggest monthly performance since March 2016, when it had gained 10.2 per cent. Nifty has gained 5.9 per cent.

On a year-to-date basis, Nifty and Sensex are up 27 per cent and 25 per cent respectively. Following the sharp rally this year, the valuation of benchmark indices have climbed to multi-year highs.

According to ICICI Securities, the cyclically-adjusted price-to-earnings ratio (Cape) at its highest point since 2008, which is a worrying sign given that earnings up cycle has not yet picked up.

“If growth does meet expectations of robust recovery in the short term, then, given the attractive medium-longer term outlook for macro-economic growth, the current valuations appear reasonable,” says ICICI Securities.