In the first two months of 2023, Indian indices fell around 4.5%. Market observers suggested that India was 'out' as the emerging market investors were betting on. The new favorites would be China and Taiwan.

But fast forward to now, and there's been a remarkable recovery - the benchmark Nifty 50 index has risen over 9% from the year’s low, and now stands 3% away from its all-time high, which it hit in December last year.

What is driving the momentum? A key factor is the increasing bullishness of foreign institutional investors (FII) on India. FII inflows into Indian equities accelerated in May. And one reason the Indian market is becoming more attractive to foreign investors, is the risk of the US defaulting on its debt.  

If President Joe Biden and House Speaker Kevin McCarthy cannot reach a deal to raise the US debt ceiling by June 1, there is a real possibility that the US Treasury will run out of money, and default on its payments.

However, such back-and-forth negotiations and threats are typical in the United States before an agreement. The last debt-ceiling standoff happened as recently as 2021. While the likelihood of a default is low - few US elected officials actually want to see a humiliating default happen on their watch - the uncertainty has cast a shadow over the US stock market and prompted investors to move money into alternate investment destinations until an agreement is reached.

But this is not the only reason FIIs are investing in Indian equities.

Let’s dive in.

In this week’s Analyticks:

• FIIs have increased their investments into India. Is this a blip, or will it last?
• Screener: Stocks with rising FII holding, strong performance in Q4FY23 and outperforming the Nifty 50

Will the FII inflow into Indian equities continue?

The IMF Managing Director Kristalina Georgieva was not a cheerful person at the start of the new year. She had some tough words about the global economy: "2023 is going to be harder and more stressful than 2022," she said, "with recessions in multiple parts of the world." 

As economies slow down, investors are struggling to find 'safe' securities and countries to invest in. India, which is expected to be among the fastest-growing economies in the world in 2023 and has zero likelihood of a recession, is an attractive option.  

India’s retail inflation also fell to 4.7% in April and is currently below the RBI’s upper tolerance limit of 6% for the second consecutive month. The RBI paused repo rate hikes as inflation went down, which has attracted foreign investors.

Logically, another investment destination would be China, where the interest rate is currently at 3.65% and has been on pause for nine months. But China is not very popular these days in the West after the supply chain issues during the pandemic, and as the US-China relationship deteriorated.

India in comparison, looks like a Goldilocks destination for institutional investors - not too hot, not too cold, a low-inflation, growing economy that’s not picking fights. 

As the Adani cloud lifts, FIIs turn bullish

The recent rise in FII inflows comes after investors pulled money out of Indian equities in January. China was reopening, and the Adani-Hindenburg crisis had raised questions about the health of the Indian stock market.

But since March, there has been a consistent inflow of FII funds into Indian stocks. This has continued through April and May. 

In May, FIIs have invested (net) in Indian equities in every single trading session. In fact, their 16-day buying streak is still active as of May 22, and is the longest streak in three years. FIIs are favoring the auto and auto components sector as the sector saw FII inflows every month.  

US investors may be parking money into foreign equities (like India) until a last-minute agreement is reached to raise the debt ceiling. This could mean a sharp outflow of FII funds once US President Biden and House Republican Speaker McCarthy make a deal. 

Despite potential short-term outflow concerns, FII inflows into India could continue to rise as the country is expected to be one of the fastest-growing economies in the world this year. This is despite the IMF and foreign brokerages lowering India’s GDP growth projection for 2023. 

Indian retail inflation moderates, RBI pauses rate hike

The RBI’s decision to pause interest rate hikes in its May meeting, has boosted investments into India. Devang Shah, co-head of fixed income at Axis MF, even anticipates 50 bps of rate cuts in the next 12 months.

Morgan Stanley also expects rate cuts in early 2024. Usually, equity markets become more attractive as interest rates decrease, and investors increase their asset allocation in stocks. 

The US Fed and the European Central Bank, on the other hand, have continued with their rate hikes in May. While the US Fed is expected to keep the same rate at its next meeting, a rate hike is on the cards for the ECB due to high inflation levels in Europe. 

India seems to be doing better here. Inflation in India has fallen due to decreasing fuel and food prices, which are major components of the CPI. 

While inflation in the US, UK and EU softened over the past six months, it is still over expected levels. When asked about the rocketing food prices in the UK, former minister for employment, Anne Widdecombe, said, “Don’t make cheese sandwiches if you can’t afford them.”

The global landscape looks chaotic. Biden and McCarthy are fighting in the media, China is battling sanctions, and the UK is worried about the price of sandwiches. India looks like a safer bet in comparison for foreign investors, and the benchmark Nifty 50 index reflects that belief.  

Screener: Stocks with rising FII holding, strong performance in Q4FY23 and outperforming the Nifty 50

With the shareholding data for Q4FY23 in hand, we take a look at stocks that have seen the highest rise in foreign institutional investor (FII) holdings. This screener consists of stocks that FIIs bought in Q4, with strong financial performance, and which also outperformed their industries and the Nifty 50 index.

The stocks in the screener are from industries like banks, IT consulting & software, auto parts & equipment, pharmaceuticals and heavy electrical equipment. Major stocks in the screener are Equitas Small Finance Bank, Sona BLW Precision Forgings, Syngene International, KPIT Technologies, CG Power & Industrial Solutions and Adani Enterprises. 

Equitas Small Finance Bank saw the highest rise in FII holding, with an increase of 18.6 percentage points QoQ to reach 22.7% in Q4FY23. While funds like Ellipsis Partners LlC and Massachusetts Institute of Technology bought a 2.5% stake each, Rimco India purchased 2.1%. The bank’s stock price surged 17% over the past month, boosted by strong Q4FY23 results.

Sona BLW Precision Forgings saw its FII holding rise by 13.4 percentage points QoQ to 35.3% during the quarter. While major buyers of the auto parts & equipment stock were the Government of Singapore and Fidelity Funds, which bought 4.1% and 1.3% stake respectively, BNP Paribas Arbitrage increased its stake by 130 bps. The stock grew 14.4% over the past month, owing to a 35.3% YoY improvement in revenue for the quarter.

Syngene International saw a 6.4 percentage point QoQ improvement in its FII holding, totalling to 23.3% in Q4FY23. The Government of Singapore was the biggest buyer as it bought a 3.9% stake in the pharmaceutical company. Its net profit rose 20.9% YoY, while revenue surged 31.2% YoY in Q4FY23. This helped the stock grow by 13.3% over the past month.

You can find more screeners here.