 "FIIs turn bearish ahead of June 1 exit poll outcome; index shorts at 87.13%")
Foreign Institutional Investors (FIIs) have turned extremely bearish ahead of the Lok Sabha elections outcome in India, which will be out on June 04. The exit polls will trickle in from June 01 (Saturday) onwards.
On Thursday, as the Nifty took another near 1 per cent hit, the FIIs built aggressive shorts in the index futures in the derivatives segment. The FIIs index long-short ratio, which stood at 0.98, suddenly plummeted to 0.15, with index shorts as high as 87.13 per cent post expiry of the May series contract.
The index futures long-short ratio is a measure of the number of bullish bets as against bearish positions. A low ratio indicates that FIIs are bearish on the Indian equity market and vice versa. The Nifty, Bank Nifty and MidCap Nifty are the most actively traded futures contracts, NSE data shows.
“No one is ready to take a punt on the election outcome, especially the FIIs, who as it think that the Indian markets are expensive. The recent F&O expiry for May contracts has added to the volatility and nervousness. People are sitting on their hands and waiting for the Lok Sabha poll outcome to ascertain who will form the next government, with what strength and what does it mean for policy continuity,” said Unmesh Sharma, head of institutional equity at HDFC Securities.
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Interestingly, the FIIs had taken bearish bets on the markets earlier this month as well, with the index long-short ratio dropping to a low of 0.36 on May 16. However, FIIs as the Nifty recovered and rallied to record highs, the FIIs were forced to cover shorts and turn bullish for a brief period, with the ratio shooting up to 1.17 on May 28, a study of the overall index long-short ratio in May shows.
Meanwhile, in the cash segment too, FIIs have been aggressive sellers, with net sales of stocks to the tune of Rs 43,827 crore as of May 30, the highest net monthly sales since June 2022. In the current calendar years, FIIs have net sold stocks worth Rs 1.28 lakh crore so far in the first five months.
“The Nifty50 has tested the 50 per cent Fibonacci retracement of the rally witnessed from the lows of 21,820 to the lifetime high, a significant sign of caution. For now, 22,450-22,400 level seems to be the last hope for the bulls, as any decisive breakdown is likely to disrupt the technical structure. On the higher end, 22,600-22,620 zone is expected to be seen as an intermediate hurdle, followed by the sturdy resistance of 22,800 in the short term," said Sameet Chavan, head of technical and derivative research at Angel One.
Bullish stance
That said, retail investors seem to be an optimistic lot in the derivatives market in the backdrop of the exit polls and the with Lok Sabha poll outcome.
As of May 30, retail investors' long-short index futures ratio stood at a 2.24, indicating more than one bullish bet for every single short. The total index longs stood at 69.09 per cent, the highest since 2014 pre-election outcome period.
Similarly, retail investors hold almost 92.88 per cent long positions in single stock futures; this is at the highest point so far in May. In comparison, FIIs stock futures longs stand at 55.82 per cent.
As a strategy, however, Sharma of HDFC Securities expects some profit booking to set in post the outcome of the Lok Sabha polls. Large global asset allocators and funds, he said, do not take a view on election outcomes per se. Some foreign money that is currently waiting on the sidelines, he said, should enter the markets for a short term.
“The broader trend remains moving money to China and a bit of withdrawal from India due to valuation concerns. People who are taking money out of India are also withdrawing from the emerging markets (EM). But those who are taking it out on valuation concerns, the biggest sink for that money seems to be China,” he said.