Containing COVID-19 key to FPI flows in India despite low oil price: ICICI Securities

Foreign portfolio investors (FPIs) have sold stocks worth $4.5bn and bond outflows exceed $4bn till March 16, this year.

Stock performance indicates relatively higher institutional selling in realty, banks, metals and IT, while selling in mid- and small-caps may not have been significant given the lower underperformance vs previous instances of large drawdowns.

But net oil import status and low incidence of COVID-19 in India so far (with government efforts at containment and summer heat catching up) should improve the outlook of active global fund managers towards India on a relative basis. Spike in COVID-19 cases remains a key risk to FPI flows, ICICI Securities said.

Outlook for flows

"Systematic outflow from equities as an asset class via ETF route is negative for all emerging markets ncluding India flows. Euphoria in broad markets missing even before the sell-off: In previous cases of market crash such as the GFC, broader markets (Mid and small caps) were clearly in euphoric zones. Currently, broader markets do not indicate any euphoria as they have witnessed significant underperformance since the beginning of 2018," the report from the brokerage house said.

According to ICICI Securities, risk aversion is not resulting in underperformance in the overvalued area of quality and growth while fundamentally sound value stocks are approaching their tipping point in terms of higher cash flow / earnings yields. A combination of low quality and low earnings yield is the most vulnerable factor in the current sell-off, the report said.

"Economy is not overheated and stimulus by policy makers should ensure a soft landing: Typical risk during market tops is that the economy is overleveraged (Operating + Financial leverage) and a demand shock crops up, leading to a hard landing. In the current scenario both operating leverage (Capacity utilization at sub 70%) and financial leverage (Credit growth at sub 7%) are below par. Valuations are attractive with market cap to GDP at 58.6 per cent, and earnings yield exceeding bonds’ by 136bps," ICICI securities said.

What happened in Feb’20

FPIs bought selectively in February 2020 buying sectors including retail (Rs24bn), Energy (Rs13bn) & Telecom (Rs7bn) and selling – consumer staples (Rs30bn), Industrials (Rs26bn) and Banks (Rs15bn).

MF buying across size caps and sectors except IT, PSU banks and Metals: Within size segments, buying by mutual funds was largely focused towards large caps (Rs134bn) although mid- (Rs26bn) and small-caps (Rs16bn) also witnessed buying. MF’s continued to mobilise higher funds in mid and small cap schemes during Feb’20.

What’s happening in Mar’20

FPIs have sold equities worth $4.5bn and bond outflows exceed $4bn (data till 16th March’20)

Stock performance indicates a) relatively higher institutional selling in realty, banks, metals and IT, b) while selling in mid- and small-caps may not have been significant given the lower underperformance vs previous instances of large drawdowns.

Outlook for flows

Systematic outflow from equities as an asset class via ETF route is negative for all EMs including India flows.

Net oil import status and low incidence of COVID-19 in India so far (with government efforts at containment and summer heat catching up) should improve the outlook of active global fund managers towards India on a relative basis. Spike in COVID-19 cases remains a key risk to FPI flows.

Euphoria in broad markets missing even before the sell-off: In previous cases of market crash such as the GFC, broader markets (Mid and small caps) were clearly in euphoric zones. Currently, broader markets do not indicate any euphoria as they have witnessed significant underperformance since the beginning of 2018.

Risk aversion is not resulting in underperformance in the overvalued area of Quality and Growth while fundamentally sound value stocks are approaching their tipping point in terms of higher cash flow / earnings yields. A combination of low quality and low earnings yield is the most vulnerable factor in the current sell-off.

Economy is not overheated and stimulus by policy makers should ensure a soft landing: Typical risk during market tops is that the economy is overleveraged (Operating + Financial leverage) and a demand shock crops up, leading to a hard landing. In the current scenario both operating leverage (Capacity utilization at sub 70%) and financial leverage (Credit growth at sub 7%) are below par.

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