BofA expects markets to consolidate; could lead to FII inflows slowing down

In August itself, foreign portfolio investors (FPIs) have bought Indian equities worth $5.5 billion.

Bank of America (BofA) Securities expects Indian markets to consolidate in the near term. This could lead to the foreign institutional inflows into the markets slowing down, it said. Interestingly, the BofA report comes at a time when the institutional flows have been robust after the March outflows. In August itself, foreign portfolio investors (FPIs) have bought Indian equities worth $5.5 billion.

The report stated that FPI flows had continued to remain robust to date despite domestic institutional flows turning negative. According to the report, flows through exchange traded funds (ETFs) have remained negative for seven straight months. Thanks to Reliance Industries, the FPI inflows in July were the strongest in the energy sector followed by the discretionary and information technology (IT) sectors. Conversely, the telecom and financials sectors saw the maximum outflows. Going forward, the foreign financial services firm also sees a limited upside left in pharmaceuticals, IT, and telecom stocks. BofA Securities said, “We believe FII flows for industrials and materials sectors could turn positive especially given their underweight positioning and improving traction for Make in India and government’s capex push.”

Its global quantitative strategy team stated that global funds continued to be relatively overweight on India as opposed to other Asia-pacific countries because India received inflows from FPIs whereas other emerging markets (EMs) such as Malaysia and Brazil saw outflow of FPI capital. “MSCI India’s valuation premium to EM is now at 50%, versus the long-term average of 36%. We expect the market to consolidate near term but see private sector financials having the scope to drive the rally thereafter once clarity on NPAs emerges,” said the foreign financial services firm.

With respect to domestic institutional investors, BofA Securities added that DII flows remained muted in July and given that the valuations were now peaking, a further redemption could not be ruled out in August.