nifty: Nifty’s Resilience Amid Fierce Exit From FIIs: Should You Rejoice Or Worry?

It seems that there is no respite in the liquidation of FII in the Indian market. Daily sales figures have been over a billion dollars for a while. This calendar year alone (January to March), the count has surpassed the one trillion (Rs) mark by a wide margin. FIIs have made a staggering amount of over $20 billion (net sales) since October of last year.

To put this in context, during the fall of March 2020 in the midst of the pandemic, it was much less than $10 billion. Going back, even during the global financial crisis of 2008, the figures did not exceed 15,000 million dollars. What is happening now is more of an exit as past sell-offs pale in comparison. It is a large-scale exodus. Such a large exodus should have hit investors very hard, considering the nasty drop (both during the GFC in 2008 and in March 2020) on previous occasions with less FII liquidation. But investors, though bruised this time, are not completely wiped out.

Sensex and Nifty appear to have survived the FII scare with marginal losses. Year-to-date, they’re down a little over 1.5% this calendar year, but not by much. The same goes for the broader markets. Small- and mid-cap indices have weathered the scare without leaving a serious scar. They have dropped by 5.63% and 4.73%, respectively. All these numbers are from March 25.

The level of resilience that the Indian market has exhibited has seriously surprised even the most experienced investors. Some of them are really puzzled. If someone had told you at the beginning of the year that oil is going to flirt with the $130 level in the midst of a raging war in Ukraine and that the IIFs will be withdrawing en masse from emerging markets in the cycle of tightening and tightening Fed, they would have The rupee and equities were expected to be massively devastated big time in India. But here we are now with the rupee barely moving and stocks surviving with slight losses.

There are two ways to view this resilience. One view is that domestic investors, both retail (via a growing SIP book) and institutional, who are playing a major role in this resilience, are convinced of India’s medium- to long-term prospects. For them, the market is signaling an increase in the economic and earnings cycle in the coming years. They expect the corporate growth and profit cycle to significantly surprise in reform-focused policy stability, China+1 trigger, super-digitalization up-cycle, PLI-based manufacturing expansion, etc. These investors belong to the more optimistic camp. On the other hand, bearish investors believe this resilience may lead to a much larger drop if domestic investors ever drop their support for FII’s relentless sell-off amid growing fears that commodity inflation can slowly seep into structural stagflation. According to them, it is better to wait on the sidelines. Only time will tell which way the wind will blow.

Now it is critical to understand the historical perspective. Otherwise, one will be frozen in inaction clouded by short-term uncertainties. It is important to remember that no macro risk in the past had a lasting impact beyond a few quarters. If one goes back and looks at past macro challenges in previous cycles, each macro event has been a clear buying opportunity in hindsight. Even in the worst global financial crisis of 2008, where everything was falling apart like nine bowling pins, the event did not last more than three quarters for the market.

The entire FII sales saga can also be seen from another perspective. That is, what would happen to the market when much of the money from the FII exit returns, which it usually does, after normalcy returns? Even if half the money ($10 billion) comes back quickly, one can imagine where that could take the market, especially when local and global investors are on the same buying side.

Depending on their investment horizon, investors should capitalize on this consolidation to build a structurally sound portfolio from the bottom up for exceptional returns over time. Even more so, because the market seems to have more or less priced in the cycle of reduction and the rises in interest rates by the Fed. What has not yet been ruled out is how far the risks of geopolitics can go. Can it become a larger conflict or will it be contained? What happens on that front will determine the short-term market trend.

(ArunaGiri N is Founding CEO and Fund Manager of TrustLine Holdings Pvt Ltd. Opinions are personal)

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