London-based financial advisor Elara Capital believes that a combination of factors could prevent FII liquidity from returning to Indian markets anytime soon.
“Alternatively, the risks of oversupply from FII could be greater,” the company said in a note.
“In the past, Indian markets have always underperformed emerging markets after a big sell-off of the manufacturing division as it impacted prices. However, this time India’s outperformance remains at a historic level. This also leads to increased foreign liquidity transfer to other emerging markets. underperforming (largely China).”
The global firm indicated that this is the only time that despite such high demand from outward investment inflows of equities, the relative allocation of FIIs in Indian markets has remained at a record level due to buying from local institutional investors and retail players.
Foreign institutional investors have sold net Indian shares every month since October 2022. NSDL data showed FII net share sales from October 2021 to May 2022 at a staggering Rs 1.9 crore.
Global Alarm Bells
It is no secret that global factors are not exactly favorable for bulls to dominate the stock markets at the current stage. A large group of central banks, including the world’s largest economy, have embarked on a tight monetary tightening cycle, which means tightening financial conditions around the world.
Elara Capital warned that ripples will be felt in India, especially from a valuations perspective.
According to the global company, the crash in the Nasdaq has historically been a leading indicator of global markets entering a rating downgrade mode. The stakes are higher for expensive names whose ratings can take a hit even in the face of a small profit disappointment.
Indian markets could also deteriorate along with the Nasdaq. This correction phase of 18200 was led by the Nasdaq. Major support for Nifty is between 13,000 and 13,500. This is the maximum acceptable price damage to keep bull markets going,” Elara Capital said.
The company warned that because the stock price rally was sharp, the rebounds could be sharp as well.
“Only a break below 13,500 could challenge India’s larger structural trend.”
The two major benchmarks, Nifty and Sensex, had returned about 20 percent in the previous year, outperforming many global markets.
“After breaking down on the busiest topic of the decade (US growth/tech stocks), we can see liquidity expand and shift to other markets. This would be similar to what we saw in 2000-2002, which was the last time the US growth/tech was seen. Big crash,” Elara Capital said.
This laid the foundation for a significant shift in liquidity to emerging markets over the next few years. For Indian stocks, this could be the pain stage before bigger gains are made.”
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