Where are FII’s parking their money?
Last updated: 28 Jul, 2020 | 02:35 pm
Consistent inflow in equities, continuing pressure in debt markets!
- FII investment flows are a major factor in driving the direction of financial markets in India.
- After record FII outflows in March amid the Covid-19 induced market crash, FII equity investments in the following three months have had positive flows. This support from FII’s has helped the Indian equity market to stage a rapid comeback. However, “FII’s have continued to sell their debt investments with July being the fifth consecutive month witnessing outflows.”
Why are FII’s pouring in money into the markets despite a gloomy economy?
- Liquidity- The US Fed has so far poured in over $3 tn in aid to various facets of the US economy. This includes direct cash to citizens, direct loans to companies, and purchasing of all kinds of bonds.
- This flood of money into the economy causes asset prices to rise- Hence you see US markets at all-time highs.
- Spillovers of these stimulus funds are finding their way to global markets. “Within the emerging market ETF allocation, India currently finds about a 8.8% allocation of funds against HK/ China(mainland) of over 40%”
Sector Wise FII Flows Breakup
- During April - July 15th, FII’s have dumped a massive $2.5 Bn (Rs19,000 cr). worth of investments in India’s Sovereign debt because of concerns of fiscal slippage, rating downgrade, and a weak macro outlook.
- “The Household & Personal Products (HUL, Marico, Godrej consumer, Tata Consumer) which is amongst the sectors least affected by COVID received the highest FII inflow of almost $2bn (~Rs 14,000 cr)”.
- An influx of liquidity in the global markets has caused a sharp rebound rally from the March lows. The US Fed, RBI, and a lot of other central banks around the world have pumped money into the system. With unattractive interest rates, excess liquidity and savings are often pumped into the stock market.
- In the debt segment, Risk aversion has been at its peak with Credit Risk Funds (which invest at least 65% of their assets in papers rated below AA+) seeing highest outflows, Their size has fallen from ₹55,380 crores on 1 April 2020 to ₹29,423 crores on 1 July 2020. The pain in the debt markets is yet to be seen, as moratorium gets lifted the number of defaults is expected to shoot up.
- Both equity and debt markets are expected to remain volatile in the medium term
- Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the economic crisis
- Stick to high-quality AAA-rated low duration funds and bonds. Prefer safety over high yields in this volatile market.
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