Foreign Portfolio Investors (FPIs) have turned aggressive sellers in Indian equities in May 2024, largely spooked by the uncertainty over outcome of general elections. They now favour the ‘Sell India, Buy China’ trade due to cheaper valuations in Chinese and Hong Kong Markets, said market experts.

FPIs have net sold Indian equities to the tune of ₹ 17,083 crore so far in the seven trading sessions in May 2024, taking their overall outflows in equities from India this calendar year to ₹14,861 crore, data with depositories showed.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that selling by FIIs in the cash market in May was much higher at ₹24,975 crore. 

He said that the situation can change dramatically when clarity emerges on the election outcome. “If the election results turn out to be favourable from the market perspective, aggressive buying by DIIs, retail and HNIs can push the market sharply up”, Vijayakumar said.

Vix at peak

The volatility index (Vix) — also known as a fear gauge — touched 18.4 (the highest this year) this past week as equity benchmarks saw sharp corrections in both benchmark indices and broader markets. So far in May this year, Nifty50 is down 2.5 percent, falling 500 points. 

The fear gauge had hit a low of 10.2 percent on April 23 this year. Analysts however noted that Vix surge so far is much lower in the latest general elections as compared to 2019 and 2014 editions.

Tarun Singh, Founder and Managing Director of Highbrow Securities, said that the prevailing market volatility, conspicuously reflected by the India VIX, underscores the existing selling pressure, primarily affecting overvalued large-cap stocks. “The temperament of FPIs, largely speculative and focused on ephemeral gains, overlooks the broader, long-term growth narratives of economies like India or Hong Kong. Despite current valuations rendering India’s market relatively expensive, forthcoming electoral outcomes hold the potential to recalibrate foreign investor interest. This adjustment could foster a decrease in market volatility, anticipated to reflect in the Vix’s stabilisation in the near-term”, Singh said.

Market watchers noted that this aggressive selling by FPIs may have been prompted by worries and murmurs about the low voter turnout in first three phases of general elections and whether the ruling alliance will get the number of seats earlier anticipated.

Vijayakumar said that the divergence in institutional activity is becoming stark this month. “FIIs have turned sustained sellers and DIIs have turned sustained buyers in all trading days of this month, so far, with cumulative FII selling of ₹24,975 crore and cumulative DII buying of ₹ 19,410 crore,” he said.

Vijayakumar however maintained that FPIs are aggressively selling Indian equities not because of concerns relating to elections but due to Indian equity markets (Nifty down by 2.06 percent in the last one month) underperforming while Shanghai Composite and Hang Seng were outperforming by 3.96 percent and 10.93 percent respectively in the last one month. “The FPI strategy is to sell India which is expensive and buy China which is very cheap, mainly through Hong Kong. The PE ratio in India is more than double the PE ratio in Hong Kong,” Vijayakumar said. 

So long as this ‘Sell India, Buy China’ trade sustains FII selling will weigh on the markets, he said.

Last month, FPIs sold shares worth ₹8,671 crore. However, in March and February, FPIs were net buyers to the tune of ₹35,098 crore and ₹1,539 crore, respectively, after selling shares worth ₹25,744 crore in January 2024.

Singh said that the latest equity market volatility, while indicative of market uncertainty, can also be seen from an economic perspective as approaching a potential market floor — historically a strategic point for initiating long-term investments.