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After five months of heavy inflows from foreign institutional investors into Indian equities, September saw a reversal in trend with $1.1 billion of outflows, a BofA Securities study revealed. At $0.9 billion, active funds led the outflows. Passive funds also witnessed ($0.1 billion) outflows, in continuation of the trend seen over the last nine months, according to the study.
“Amongst sectors, FII outflows were the most in telecom (-$766 million), staples (-$428 million), and financials (-$323 million) whereas healthcare ($124 million) and IT ($85 million) saw moderate inflows,” the study added.
“Recent earnings within the financials sector provide comfort awaited by the markets that potential loan restructuring/NPAs for well-run financials likely won't be excessive. We expect this to act as a trigger for well run and well capitalised private sector financial stocks (our banks analyst prefers HDFC Bank and ICICI Bank),” the brokerage firm added.
“We retain our Overweight stance on financials and expect the sector to rally despite likely consolidation for markets in general. We also continue our Overweight on industrials & materials sectors. We see scope for further FII repositioning in these sectors on improving traction for Make-in India/Govt's capex push,” it said.
However, the foreign brokerage firm remained NeutralWeight on pharma, IT and telecom sectors and underweight on the discretionary sector.
Mixed signal from DIIs
In contrast to negative DII flows the past three months, DII flows turned positive at $ 85 million in September. While passive funds doubled m-o-m to $0.5 billion, active funds continued to see net outflows (-$445 million) for the third month in a row, with withdrawals across most fund types -- multicap fund -$155 million and large-cap fund -$78 million. However, large & midcap fund saw inflows of $84 million.
As of September end, within the NSE universe, FIIs maintain large OW positions in energy (+6 per cent), financials (+4 per cent) and IT (+2 per cnet), whereas DIIs are O/W in financials (11 per cent) and IT (+2 per cent).
Industrials turn favourite
“Recent large fund raises have improved capital ratios for well-run private financial firms to highest levels historically, providing downward support to valuations and visibility of no large credit costs acting as a positive trigger," BofA Securities said. Besides, FIIs are still UW (-0.7 per cent) on Industrials, DIIs have raised allocation toIndustrials (O/W +0.6 per cent), supporting our view on likely rotation in the sector on improving traction for Make in India and potential capex push”.
While India valuations are in line with emerging markets, FII flows wil slow further, it opined.
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