Markets see highest weekly sell-off by FIIs in nearly 6 mths

The Indian equity market, which has seen record foreign inflows since the beginning of June, is witnessing a trend reversal. In the last one week, foreign investors have been major sellers of Indian equity. Experts say the primary reason for this is the stretched valuation of the Indian market.

According to Bloomberg data, foreign institutional investors (FIIs) net sold Indian shares worth nearly $630 million between December 6 and 9 (Friday’s data is not yet available). This is in sharp contrast to the previous week (November 29-December 3), when FIIs poured more than $600 million into the domestic equity market.

It is also the highest weekly sell-off in over six months. For the week ended May 21, FIIs had net sold Indian equities worth $1,109 million, the highest sell-off in the current financial year.

Last week’s FII sell-off was also the highest among Asian economies. In the same period, South Korea reported a net inflow of $593 million. Taiwan ($468 million) and Indonesia ($394 million) also attracted substantial inflows.

“Valuations in India are on the elevated side right now,” said Goldman Sachs Chief Asia Pacific Equity Strategist Timothy Moe. “Valuations will narrow down, as the US and other developed economies in northern Asia catch up,” he added. According to Moe, India is the only market with significant negative earnings revisions over the past three months.

Goldman Sachs analysts say high inflation, a surge in commodity prices and delays in key policy reforms are the risk areas in India. The global financial major remains underweight on Indian equities. It expects emerging markets to underperform in the first half of next year, while catching up with developed markets in the latter half.

In a similar context, an institutional dealer with a large domestic brokerage said the coming days will see more FIIs squaring off positions ahead of the year-end bonus payout. “Hedge funds and foreign investors follow a calendar year, while deciding on country-specific allocations. December is also the month when bonuses are paid based on the fund performance and so positions are liquidated. This leads to significant sell-offs,” he said.

Market players also add that foreign players are closely watching developments after the recent scams. Meanwhile, the current calendar year has seen record foreign inflows. According to data available on the website of the Securities & Exchange Board of India, FII flows increased sharply to $27.5 billion in 2010.