Will Foreign Investors Turn Net sellers in 2024 ?

huge selling in stock market

2024 starts with Huge FII (Foreign Investment Institutions) selling! Is 2024 going to be a Nightmare for Investors?

The Foreign giants stepping out of the Indian at the very first month of 2024 by selling in cash Markets worth Rs 35,977.87 crores. Meanwhile the Domestic institutions bought for Rs 26,743.63 giving optimism for Indian retail participants. Domestic institutions have been the unsung heroes, protecting the market from major crashes and promoting sanity in the market. But the major question is: How long can they maintain this supportive role?

During the month we have seen huge intraday falls and gap down openings shaking the market. The market has made a 1%-2% move intraday as the new normal making it difficult for the retail participants to digest and trade with the direction. People expects sanity in markets the India Vix is trading at a range of 10 –15.

Why did FII (Foreign Investment Institutions) turn down their optimism and started to sell the Market?

We have seen how Indian markets performed in year 2022, when FII (Foreign Investment Institutions) has the net seller for the year. FIIs (foreign investment institutions) sold stocks worth Rs 2.78 Lakh crore in the Indian market in 2022. If the FII’s have a weaker outlook for the Indian market and things are not come up with their risk appetite there is a higher probability for them to turn net sellers. Let’s Understand the major factors that can affect the outlook of Indian market for foreign fund inflows.

India Specific Factors Why Foreign Investment Institutions are selling in Indian Market

Lower than Expected Corporate Results

The Quarter 4 results of major blue-chip companies has brought in huge volatility destroying investor confidence. The earnings were below than the expectations and this created negative sentiment, forcing the foreign investments to sell. Index heavy weight HDFC bank has posted their first result after the merger on 16 January 2024. The results were not up to the investor’s expectation and the stock was punished instantly dropping more than 10 % dragging the banking index to a crucial support zone.

Election Uncertainty

Elections can have a huge impact on the stock market depending upon the various economic, political and market factors. Stock market reactions to elections are highly volatile and can be complex. Institutions may find it difficult to get a favorable risk to reward ratio for their investments.

  • According to the past stock market performance, the market always prefers for Continuity in government. Changes in government can cause changes in economic and business policies which can slowdown the economic growth.
  • Change in government can influence the dynamics of stock market as it can affect the interest rates of a country.
  • Fiscal policies of the government, about taxes and expenditure, can affect sentiment of stock market. Investors frequently evaluate the potential impact of election results on fiscal policy.
  • Political Instability can bring in weakness in the investor sentiment and there by affecting the stock market. A politically stable economy fosters investor confidence and brings in positive market sentiment.

Overvalued Indian Market

The markets had a bull run in the November and December month of 2023. Markets were in a euphoria stabbing the bears in every aspect. Indian stock markets were seen expense and overvalued as compared to other emerging markets. Which provided the Institutional investors to sell their holding in Indian markets and re-balance their portfolios. A sectoral shift within the Indian market by the foreign institutional investors can also bring in weakness across specific sectors.

Global reasons behind Foreign investment institutional selling in Indian market

War and Political Tension

Geopolitical events can adversely affect the stock market depending on the nature and scale of the conflicts. Rising political tensions can be a reason that foreign investment institutions are booking their profits to brace themselves from the stock market volatility.  During the time of Geopolitical events or conflicts investors prefer to invest in currencies of countries with stable economy or safe assets like gold, bonds etc. This shift in assets preference by investors can bring in weakness in the stock market.

  • Geopolitical tensions and events can cause knee jerking effect on the world economy as it may disrupt the trade, supply chains and other Prominent economic activities.
  • War uncertainties and negative news will create a weaker outlook on stock markets forcing the investors to book their profits which will lead to a huge fall.
  • To stabilize the economy and to bring in sanity in stock markets during geopolitical events, the central banks adjust the interest rates. Changes in interest rates can impact on the borrowing costs and valuation of stocks.

Rising US bond Yields

Investors prefer to invest in safer assets like bonds when the bond yields are higher. When the markets are overvalued, it is intelligent to book the profits and shift the investment to safer asset classes. Higher bond yields can trigger a weakness in stock markets as investors will start selling their investments when there is another safer investment opportunity available with good return expectations.