What is making FIIs nervous in emerging markets?

Foreign institutional investors (FIIs) have been on a selling spree across most emerging markets, including India.
 
They have sold Indian equities worth over $7 billion thus far in 2022 – and over $11 billion since October 2021, when they started to unwind positions here.

According to analysts, the nervousness, right now, is more on account of the likely policy actions of global central banks, especially the US Federal Reserve that is seen hiking rates aggressively in the backdrop of three-decade high consumer price inflation in the US.
This, they believe, can see the bond yields spike and make equities less attractive.
 
According to Devang Mehta, head of equity advisory at Centrum Wealth, FIIs have sold equities since October 2021. What’s worrying them is a long tenure of zero interest rates across the developed world that seems to be nearing an end. Any balance-sheet contraction by the US Fed, either in terms of quantum or timing, can be a further hindrance. High oil prices are another cause for concern for our economy.
 
The S&P BSE Sensex and the Nifty50 have lost around 3% each since October 2021 when the FII started to sell, data show.
Realty, fast moving consumer goods (FMCG) and healthcare indices have been the worst performers among sector indices that have slipped 7% to 11% during this period.
Domestic institutional investors (DIIs) and mutual funds, on the other hand, have used this opportunity to buy.
 
Since October 2021, MFs and DIIs lapped up stocks worth nearly Rs 68,000 crore and Rs 94,000 crore, respectively.

Going forward, analysts say FIIs may choose to remain on the sidelines for now, and come back in a big way in the later part of 2022.

“India is expected to receive a good share of flows once the volatility subsides. Domestic flows from retail investors, HNI’s family offices still remain strong and have provided a good cushion to the markets when FIIs intensify their selling. A good probability of earnings growth along with a decent valuation rerating can compel FIIs to come back with force,” said Devang Mehta, Head of Equity Advisory, Centrum Wealth.

FIIs, according to Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management, still look at India as a structural growth story despite the near-term headwinds.
 
“The selling pressure should ease a bit in the coming months, as the economic activities gain momentum once the Omicron-related disruptions abate and corporate earnings catch up to justify India’s premium valuation,”said Jitendra Gohil, Head of India Equity Research of Credit Suisse Wealth Management.

The sentiment on Tuesday is expected to remain cautious with nervousness around the rising oil prices taking center stage. That apart, market participants will take cues from global markets before deciding their trading strategies. Stock specific movement is likely to continue as companies announce their December 2021 quarter earnings.

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