World’s best performing large stock market is set to see record foreign outflows

It may have the cachet of giving the best returns among its peers in 2022, but the Indian stock market is set to record the highest ever withdrawal of money by foreign portfolio investors (FPIs).

With global central banks rising interest rates and the rupee weakening several foreign investors pulled out money from the local stock market at record pace in the first half of the year, before ploughing back some of it in the second half.

That said, FPIs have withdrawn $18.1 billion from the Indian stock market heading into December, which is more than the $13.3 billion taken out by the same cohort during the global financial crisis of 2008, according to Securities and Exchange Board of India data.

However, the record pace of outflows from foreign investors, who own close to 40 percent of the market’s free float, has had little impact on the performance of the stock market.

MSCI India, a gauge tracked by most global investors and funds, has given year-to-date returns of 6.6 percent in local currency terms, making it the best performing stock market among those with market capitalisation of more than $1 trillion.

For comparison, the MSCI All Country World Index has fallen 17 percent in 2022 while the MSCI Emerging Market index has slipped 21 percent so far this year.

In US dollar terms, too, the Indian market has fared better than its developed peers despite foreign investors losing money. In 2022 so far, dollar returns on the Nifty 50 were down 4.3 percent against a 16 percent fall for the S&P 500 and 19 percent decline for the Shanghai Composite.

Helping offset the selling from FPIs, domestic institutional investors (DIIs) are poised to register record inflows. So far this year, DIIs have net bought local stocks worth $30 billion.

“Over the last year or so, India is looking bright from a fundamental perspective… The base case is that the market is expecting pretty strong economic growth for India over the next 3-5 years,” Pramod Gubbi, founder, Marcellus Investment Managers, told Moneycontrol.

Recently, though, foreign investors have also turned more bullish on the Indian stock market.

Since July, FPIs have made net investments of $11.5 billion largely because of increasing market confidence that global interest rates are likely to peak soon and because India’s economy is seen to be relatively better placed compared with other large economies.

A December 6 World Bank report said India would be less affected by global economic headwinds than the rest of the world.

Moreover, a new capital expenditure cycle, strong earnings growth expectations and relatively benign inflation situation are likely to help the Indian stock market attract foreign investors in 2023 after the record sell-off in 2022.

China’s dimming attraction because of rising regulatory and political instability is also likely to push foreign capital towards Indian shores amid lack of investable options within emerging market basket, analysts said.

“Our colleagues see a structural boom ahead for India,” Morgan Stanley’s strategists said in a recent outlook note for 2023.

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