FPI selloff: 5 reasons a reversal is possible; sectors to watch

Stock market: Antique Stock Broking in its latest strategy note said FPI equity selling in India continued in January and was highest within select emerging markets, due to a lack of AI related plays and continued US-India trade tensions

Noting that the US accounts for 40 per cent of FPI asset under custody, it said a bulk of FPI selling of Indian equities may be largely behind us, citing five reasons. Antique said Indian equities are now trading at an average premium valuation relative to the emerging and developed markets. FPI ownership in Indian equities is near all-time low, it said adding that the earnings outlook and macro fundamentals for the country remained strong.

Besides, it said FPI equity flow as a percentage of market cap has reached minus 1 standard deviation. Any resolution of 25 per cent penal tariff by the US may also favour FPI flows into India, Antique said.

"Accordingly, sectors with high FPI ownership (like real estate, telecom, services, and financial services) or most underweight or least overweight (capital goods, financial services, and power utilities) since Sept-18 may benefit," Antique said.

Antique said mutual funds bought into domestic sectors like consumer services, power & utilities, FMCG, and services in December, while they sold out of sectors such as IT services, oil & gas, telecom, capital goods, realty, and auto.

"On the other hand, key sectors that saw relatively higher selling by FPIs are FMCG, services, cement, and power utilities; while buying was seen in consumer services and metals & mining," it said.

Antique said since September 2018, both MFs & FPIs have been most overweight (or least underweight) on consumer facing sectors such as auto, FMCG, consumer durable, while being the most underweight (or least overweight) on financials, capital goods, power utilities, and cement.

Differing views are seen in sectors like IT services, chemicals, and telecom, it said.

"We believe that this trend may continue to reverse in favor of financials given relative attractive valuation, under-ownership, and improving fundamentals as we near the end of the rate cut cycle. We also believe that
investor preference for investment related sector may return post likely removal of 25 per cent penal US reciprocal tariff in the near term," it said.