Mumbai, Aug. 29: There is a paradox in the choppy markets.
The rupee has been battered and the stock markets have been roiled. But curiously, foreign institutional investors (FIIs) have not panicked and dumped stocks. At least, not yet.
Though foreign investors have turned net sellers more recently, market circles say that so far it has not turned into an avalanche.
According to a report from Bank of America-Merrill Lynch (BofA-ML) released today, FIIs are holding 21 per cent of Sensex equities (or 45 per cent of free-float, that is stocks not owned by promoters) which is close to all-time highs.
On the flip side, this high holding could be risky as India will remain highly vulnerable to any selloff in the emerging markets.
Foreign investors are believed to have sold in excess of $1 billion over the past seven sessions. So far in this calendar year, the FIIs have made net investments of over $11.5 billion.
While the depreciating rupee and the impact of the tapering of the Quantitative Easing (QE) programme in the US have been one of the major factors responsible for the recent fall in the markets, BofA-ML added that there had been three occasions in the past when the rupee had fallen more than 15 per cent — July 1995-February 1996; March 2008-March 2009; and May 2011-December 2011.
During these troubled times when the rupee was under attack, the stock markets fell 22.8 per cent.
The report, however, added that on all three occasions, the market bounced back within three months after the rupee stopped depreciating.
Moreover, it recovered all the losses within three months after the end of the rupee depreciation.
Market experts are divided over whether this scenario will play out again this year. While some say domestic investors must be prepared for a fairly longish winter with the tapering yet to begin and the country entering an election year, others reckon that the Fed’s tapering has already been discounted by the markets.
The optimists are pinning their hopes on Raghuram Rajan who is set to take over as the governor of the Reserve Bank of India on September 5. The feeling is that Rajan may offer some relief on the interest rate front and revive India’s growth.
BofA-ML said it had carried out a stress test to determine where the market would go in the worst case.
According to the investment bank, equity valuations tend to fall to 10 times of one-year forward earnings when there is a global crisis. At present, the markets are trading slightly below the long-term average of 14.1 times the one-year forward earnings.
It added that in the worst-case scenario, the PE multiple of the Sensex stocks could plunge to 11.5 times and the index could slide to a low of 16000.