Foreign Portfolio Investors (FPIs) have been net buyers in the equities since September this year, driving up the 30-share Sensex. Continuous buying by FPIs, after Finance Minister Nirmala Sitharaman announced a cut in corporate taxes on September 19, has led to a record rally in the Sensex that scaled an intraday record high of 40,816 on November 20.
FPIs have been scaling up their India investments with each passing month, softening their earlier cautious stance. They had been net sellers in July and August after the Budget 2019 proposed a slew of new taxes.
But FPIs turned net buyers to the tune of Rs 6,674 crore in September, Rs 14,657 crore in October and Rs 18,151 crore in November, according to data from the BSE. In contrast, during the last three months, Sensex also touched new highs, closing at 38,667 points in October, 40,129 in October and 41,021 in November.
"FPIs have contributed to this rally as it has been largely confined to index stocks and largecap stocks. This is the reason why polarisation continues on the bourses," says G Chokkalingam, founder and MD, Equinomics Research and Advisory.
FPIs are global funds allocating money to India as part of their emerging market portfolio. They are mostly heavy stakeholders and about two-third of their investments are in largecap stocks. "That is why broad indices have moved up while midcap and smallcaps have been almost untouched by this rally," he adds.
In fact, they have not fared worst than this over the last 20 years. The combined market cap of Group B shares (midcaps and smallcaps) on the BSE fell 63 per cent from March 2018 levels; it had gone down 62 per cent post the Lehman crisis.
The combined market cap at Rs 7.64 lakh crore is the lowest in the last one decade, indicating that midcap and smallcap spaces have not benefitted from the current rally. "These stocks do not typically witness institutional participation and are very volatile. Also, no in-depth research reports are done on them," says Chokkalingam.
In contrast, with FIIs' participation, BSE largecap index touched a high of 12,596 points in November. And it began with tax cuts on September 19 after which the effective corporate tax rate for companies is 25.2 per cent including all additional levies.
"The moment the government intervened with tax cuts, investors marked it as a genuine process of accepting that the economy is in a slowdown mode and a lot of things need to be done for reviving it. When the government intervenes, it has been historically seen that the economy comes back with greenshoots over the next six to 12 months and that is giving comfort to FPIs," says Siddharth Sedani, Vice President - Equity Advisory, Anand Rathi Shares and Stock Brokers.
The bullishness of FPIs is coinciding with the worsening economic indicators. India's GDP growth slumped to six year low of 4.5 percent during the July-September. Job cuts, rising unemployment and record low corporate earnings are also negative indicators. But these are not a deterrent for FPIs.
"The world over, it is a proven fact that smartest investors always do bargain buying, and go for accumulation when things don't look good as they believe this is the bottom of the economic cycle. FPIs are clearly anticipating that the worst is over," says Chokkalingam.
"The thought behind this strategy is that pessimistic scenario is the best possible time to invest in good stocks," he adds.
Sedani says FPIs always play an important role in driving up the broader markets. "They are not only seeing the measures being taken by the government, but are also looking at the budget, which is building up expectations of more industry-friendly measures," he adds.