India emerges as the most attractive market for FIIs

Foreign institutional investors (FIIs) are back in droves. Although a large part of it is due to the US Fed’s decision to defer cutting its bond-buying programme, allocations indicate India became the most favoured emerging market (EM) in October.

Asset allocation pattern of the key emerging market funds in October relative to other emerging markets shows India has displaced Russia as the highest net overweight market. JPMorgan comes out with a consensus asset allocation report every month, which reviews the asset allocation made by emerging market funds relative to the MSCI Emerging Market Index.

October's asset allocation data indicates that EM funds are overweight on India, Russia, Thailand, China, Russia and Turkey.

...

At $748 million, India has been the biggest recipient of capital flows in the last week of October, compared to other emerging markets. 

Emerging market equity funds saw redemptions of $663 million, after seeing subscriptions in the preceding three weeks. This penchant for Indian equities is visible in the September quarter data on FII ownership, even though net FII flows into Indian equities was only $61 million. The net inflows are lower due to the currency turmoil in July and August.

Ownership pattern in the September quarter shows foreign investors are focused on top stocks rather than sectors.

...

The top 50 stocks account for 77 per cent of FII investments. During the September quarter, FIIs significantly increased their stakes in Apollo Tyres, Tech Mahindra and HDIL in addition to Hexaware Technologies, Eicher Motors and Tata Global Beverages.

Ambit Capital says: “It is interesting to see FIIs increasing their stake in Apollo Tyres in the September quarter. This may be a reflection of their belief that the Cooper Tire acquisition may not go through after all.” 

During the quarter, foreign investors sold staples and financials. FIIs remained overweight on private banks and Crédit   Suisse says this stance was exaggerated by the removal of Axis Bank from MSCI during the quarter.

...

So, what have FIIs been selling?

According to analysts, FIIs have pared their stakes in YES Bank, Dena Bank, Karnataka Bank and Hindustan Unilever, besides Dish TV, Suzlon Energy and Wockhardt.

It may be said that FIIs have been steadily reducing their stake in these banks since the March quarter. However, the frenzied buying seen in October suggests there is a clear shift towards cyclicals.

The evidence of this is in the 14.3 per cent outperformance of MSCI cyclicals since the July lows.

Credit Suisse is overweight on cyclicals as they have seen earnings upgrades, while three defensives have seen downgrades. This possibly explains FIIs selling Hindustan Unilever in the September quarter.