Investments by foreign institutional investors (FIIs) took a dent in September, with a net $2.3 billion being withdrawn during the month. This was the first month of net outflows after February, and the most since the $3.66-billion sell-off in January.
Experts, in recent days, have attributed the sell-off to the market being overheated. However, one of the key factors for this pullout has been the spike in the US 10-year yield which are at their highest in almost two years. It has been on the rise consistently since the US Federal Reserve started increasing policy rates last year. It has almost doubled from 1.63% in January 2022 to 4.7% at present — a 16-year high.
He expects the Nifty 50 to be range-bound at around 19,000-20,000, depending on global factors. However, he believes that markets are overbought at this moment even though the banking sector has underperformed.
“I am not worried about valuations in the second half because of government spending and private capex, and because a good pick-up in earnings growth is possible. The markets have been overbought, and while there is opportunity in some stocks, valuations are stretched in certain pockets like mid- and small-caps,” he added.
U R Bhat, co-founder and director at Alphaniti Fintech said that there should be a negative correlation between higher interest rates and FPI inflows into emerging markets, which are considered higher-risk asset classes requiring higher returns. With interest rates in the US rising because of inflation, the Federal Reserve has continued with its hawkish stance.
Bhat expects export-facing sectors could be hit because higher inflation leads to lower purchasing power and hence a lower demand for goods and services, including those from India. On the other hand, domestic-focussed sectors may continue to be attractive as India has reasonably done well in terms of controlling inflation.
“The higher the interest rates for US gilts, the more detrimental for FPI flows. Generally, when interest rates are high, you get high risk-free interest gains. The propensity to take higher risk by investing in EMs is a bit low,” added Bhat.
Despite the heavy outflows in September, India remains in better shape compared to its peers, and the fundamentals seem to provide some cheer, say experts.
Joanne Goh, senior investment strategist, DBS Bank said the macroeconomic fundamentals of India are strong compared to other developed markets, with interest rates peaking and inflation coming down faster.
However, higher bond yields affect higher-value places such as India. And there will be be cherry-picking in terms of buying in healthcare and consumer-related sectors.
Investors are keeping an eye on opportunities in India and not deserting the markets primarily because bond yields are rising, added Goh. “There could be progress in India if valuations come off a bit,” she added.
While there are expectations that US economy will have a soft landing, Holland believes otherwise. “In my 40 years in the markets, I have never seen a soft landing. The markets have been playing up that sentiment but it looks looking unlikely.