Stock market: Rs 54,000 FPI ouflows in Oct! Where are Sensex, Nifty headed?

Foreign outflows from domestic equities have crossed the Rs 50,000 crore-mark in October so far, the second-worst monthly flows ever, with domestic flows seem to be failing to absorb its impact fully, as seen in over 3 per cent fall each in Sensex and Nifty this month. While a host of brokerages have cut India weightages in their model portfolios, India still remains their biggest 'overweight' in the emerging market space. Any FPI outflow-induced market fall should be bought into, analysts said. 

HSBC sees the recent pullback in Indian equities as an opportunity to add exposure. Despite the elevated valuations, Indian stocks continue to be supported by double-digital earnings growth expectations, high return on equity (RoE) and strong domestic investor flows. 

Data available with depository NSDL showed FPIs pulled out Rs 53,974 crore worth equities in October so far. This is the biggest foreign outflow figure since March 2020's Rs 61,973 crore. In June 2022, FPI outflows stood at Rs 50,203 crore."We remain bullish, on Indian equities over the next 3-6 months. Within the market, we prefer large-cap stocks over the mid-and smallcap stocks. From a sector perspective, we retain our preference for financials, consumer discretionary and industrials," HSBC said.

The broad ratio of MSCI China and MSCI India over several years suggested that China has had multiple short-term recovery moves, which lasted approximately two months before resuming the downtrend. The current China trade is a tactical one, and not a long term one, said Amar Ambani Executive Director at YES Securities.

Ambani said China’s monetary stimulus seems to have made its markets more appealing than India due to lower valuations. But, China faces deeper structural challenges that monetary and likely fiscal stimulus alone cannot resolve. 

In contrast, India has a stronger macroeconomic profile, which is unlikely to divert investment flows away from it. India’s weight in MSCI has been rising over the years and now stands at 2nd highest place in the EM basket, he said. 

"What we’re experiencing presently in the stock market is a long overdue correction. And it is not unusual to even see 20% corrections within large bull markets. But looking at the market structure, we expect an immediate floor for Nifty at 24700 and a long term support of 23500," Ambani said.

Attractive  valuations in other markets, particularly in Chinese stocks, may facilitate further selling by FPIs in India since Indian valuations are elevated, said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
 
"Concerns of earnings downgrades in H2FY25 render Indian valuations difficult to sustain. However, the sustained flows into the domestic mutual funds, where monthly SIPs have set a new record of Rs 24,500 in September, will ensure that all FPI selling will be easily absorbed by DII buying," Vijayakumar said.

A Bloomberg report suggested that China is seen deploying as much as 2 trillion yuan ($283 billion) in fresh fiscal stimulus this coming weekend, as Beijing seeks to shore up the world’s second largest economy.

Emkay Global sees a rangebound markets, with heightened volatility. The upside is capped by valuations as Emkay's September 2025 target for the Nifty, at a generous 22 times forward PE, is 26,000, which offers less than 5 per cent upside from here. 

"The downside is also protected, we believe, by sustained earnings growth and unprecedented macro-financial stability. The recent market sell-off is unlikely to translate into a major correction for broader indices. The big negative is an oil shock from the Middle-East conflict and diversion of FPI flows to China are transient, in our view," the brokerage said.

Viram Shah, CEO of Vested Finance said there is a possible rotation of funds from India to China, but how long this shift will last will depend on the Chinese government’s ability to resolve the structural economic issues. 

" While the Chinese market rally is encouraging, more policy steps are needed to boost economic activity and confidence in China," he said.