Foreign investors are offloading Indian stocks at the fastest pace in months.
According to data compiled by media sources on Monday, overseas funds withdrew a total of $1.2 billion in the week leading up to October 26, marking the largest outflow since early February. On Thursday alone, foreign funds sold off $768.4 million worth of Indian stocks, representing the most significant single-day net outflow since June 2022.
The frenzied sell-off of Indian stocks by foreign investors over the past week can be attributed to several factors. Disappointing earnings from bellwether companies dampened investor sentiment. Additionally, concerns about the Israel-Palestine conflict and the potential for long-term U.S. interest rate hikes have diminished the appetite for high-risk assets.
Shrikant Chouhan, an analyst at Kotak Securities Ltd., noted that geopolitical tensions combined with India's mixed earnings landscape have made investors apprehensive about the near-term prospects of the Indian market, leading to the sell-off.
Specifically, hedge funds, proprietary funds, and ETFs are pulling their investments out of India. A significant reason for this is their reduced exposure to emerging markets, including India. With U.S. Treasury yields soaring to 5% and tensions in the Middle East, risk sentiment has taken a hit.
On the other hand, long-term fund managers are largely on the sidelines when it comes to investing in India due to the country's currently elevated stock valuations. According to J.P. Morgan, India's forward price-to-earnings (PE) ratio stands at 20.2 times, 15% above its 15-year historical average. India's valuation premium relative to emerging markets is currently at 77%, compared to a historical average of 51%. The stock prices of India's largest software service exporters and major consumer companies, such as ITC Ltd. and Hindustan Unilever Ltd., declined after reporting their earnings, adding to market risks.
Furthermore, liquidity issues are also a concern. Most major foreign fund management firms already hold substantial stakes in top Indian companies like HDFC Bank and ICICI Bank. This makes it challenging for them to acquire more shares in Nifty 50 companies, as smaller blue-chip stocks don't meet their essential liquidity criteria.
