India bucks trend: FPI investments flow in despite emerging mkt slowdown

FPIs sold stocks in consumer staples, financials and information technology sectors in April 2024

Despite negative foreign fund flows in most emerging markets, India continues to attract significant investments, driven by strong ETF inflows and positive investor sentiment, according to a report by Kotak Institutional Equities (KIE), which tracks foreign fund flows into India and its emerging market peers.

ETF flows refer to the movement of money into and out of exchange-traded funds (ETFs). ETFs are investment bundles that trade on stock exchanges like individual stocks. Imagine a basket filled with various securities like stocks, bonds, or even commodities. That basket itself becomes an ETF that you can buy or sell throughout the day as the market price fluctuates.

ETF flows are a way to gauge investor sentiment towards specific sectors, asset classes, or the overall market.

There's been positive inflow of $1.5 billion into India-dedicated funds in April 2024. In contrast, there are outflows of $697 million from GEM funds. This suggests that investors are withdrawing money from funds that invest in a broader range of emerging markets, which might include India along with other countries.

India stands out

The report highlights a clear distinction between India and other emerging markets. While China, Brazil, and South Korea witnessed substantial outflows totaling over US$2.6 billion, India saw positive net inflows of US$419 million in April 2024. This positive trend is primarily driven by Exchange Traded Funds (ETFs), which witnessed a net inflow of US$428 million, offset by a minimal outflow of US$8 million from non-ETF investments.

Dedicated India Funds see strong growth: 

India-dedicated funds, which focus solely on Indian equities, also saw significant inflows. These funds attracted a combined $1.5 billion in April, with $679 million coming from ETFs and US$837 million from non-ETF investments. This indicates strong investor confidence in the Indian economy and its long-term growth prospects.

Global emerging market funds show mixed picture:

While India stands out as a bright spot, the report reveals a more mixed picture for global emerging market funds (GEM funds). These funds, which invest in a wider basket of emerging economies, witnessed net outflows of US$697 million in April.  However, a closer look reveals a preference for India within this category as well.  Allocation to India by GEM funds increased to 18.8% in April compared to 18.3% in March.

Breaking down the numbers: 

The KIE report delves deeper by analyzing investment styles within these flows.  Passive investments through ETFs continue to dominate the India story.  Listed funds witnessed $428 million in inflows, primarily driven by ETFs.  However, non-ETF investments also contributed with $837 million in India-dedicated funds.  This indicates that both passive and active investors are finding opportunities in the Indian market.

 A significant chunk, 42%, of the average Asia ex-Japan fund is invested in China and India. This indicates that investors consider these countries to be important markets in the region.

Shifting allocations in India: There are some recent changes in how much money is directed towards India.

Asia ex-Japan funds (funds that specifically focus on Asia excluding Japan) slightly reduced their allocation to India, going from 19.4% in March to 19.2% in April.

On the other hand, Emerging Market (GEM) funds, which invest in developing economies worldwide, increased their allocation to India from 18.3% in March to 18.8% in April.

Similar trend in Non-ETFs: The trend observed in overall funds is also reflected in non-exchange-traded funds (non-ETFs), which are investment funds not traded on stock exchanges. Allocations to India by Asia ex-Japan non-ETFs dipped slightly from 19.8% to 19.6%.

Conversely, GEM non-ETFs increased their allocation to India from 16.6% to 16.8%.

In short, while there's a minor decrease in investment towards India from some Asia ex-Japan funds, there's a counterbalancing increase from Emerging Market funds. This suggests that investors might be shifting their focus within the Asian market.

What did foreign investors sell in April 2024? 

Foreign investors, also known as Foreign Portfolio Investors (FPIs), were net sellers in some key sectors of the Indian stock market in April 2024. The data shows they offloaded holdings in consumer staples, financials, and information technology sectors. This means they sold more stocks than they bought in these sectors during that month. The table below provides a detailed breakdown of these net flows for April along with comparisons to previous months and years.

Sector-wise net FPI flows, April 2024 (US$ mn)

Notes:

(a) BSE had classified around 4,800 number of issuers into 22 sectors. Any FPI investment outside those 4,800 issuers, is classified under 'Others'. Source: NSDL, Kotak Institutional Equities