FPIs raise bets on FMCG stocks; prune holdings in energy and IT

In July, they were net-buyers after nine consecutive months of selling

Foreign portfolio investors (FPIs) have made a cautious re-entry into the domestic market. In July, they invested the most on fast-moving consumer goods (FMCGs), while continuing to prune their holdings in the energy and information technology (IT) sector.

According to a note by IIFL Alternative Research, FMCG stocks saw net inflows of $620 million last month, followed by telecommunications ($580 million) and capital goods ($240 million).

Energy (oil and gas) stocks saw outflows of $660 million, followed by IT ($590 million) and metals ($160 million).

FPI allocation towards the FMCG sector reached the highest level since June 2020. The sector was one of the best-performing last month, with gains of 13 per cent.

“FMCG stocks are considered to be the most defensive bets whenever there is financial turmoil globally. Even during the Lehman crisis, the fall in FMCG stocks was minimal, compared to others,” says Chokkalingam G, founder, Equinomics Research & Advisory.

Market watchers say a large portion of FPI net inflows last month could have gone to ITC. The stock is one of the best-performing among Nifty components this year, with gains of around 40 per cent.

In July, FPIs were net-buyers after nine consecutive months of selling. Their net inflows stood at $618 million (Rs 4,989 crore). So far in August, they have pumped in close to $1.6 billion (Rs 12,447 crore). Between October 2021 and June 2022, overseas players had withdrawn over $32 billion from domestic stocks.

Cooling commodity prices, softening bond yields, and hopes that the US Federal Reserve will slow its pace of monetary tightening have led to FPIs becoming buyers again.

Experts attribute the outflows from the oil and gas sector due to uncertainty created by windfall tax.

Late June, the government announced tax on super profits made by oil producers, thanks to a surge in global crude prices. The move led to a sharp fall in energy stocks. However, a reversal in the tax helped stocks recoup most of the losses.

“If prices go up, these companies will have to cough up more taxes. If they fall, they are not going to benefit,” says Chokkanlingam.

Valuation concerns saw FPIs further prune their exposure to IT stocks.

Chokkalingam says the lack of valuation comfort and margins not improving — notwithstanding depreciation in the rupee — has led to FPIs moving money out of the sector.

At the end of July, their allocation to the sector was at its lowest since March 2020. FPI allocation to pharmaceutical stocks also fell to the lowest since January 2022.

Capital goods, cement and construction, power, and banking and financial were the other sectors which saw inflows. The banking and cement sectors saw inflows after nine months of rigorous selling. The allocation to the cement sector has now risen to its highest level since 2018.

Metal stocks saw outflows for the third consecutive month. The realty sector saw inflows for the first time after seven months of uninterrupted selling. Both metal and realty sectors were the best-performers in July, with gains of 18 per cent and 17 per cent, respectively.

FPI allocation to banking and financial has reached the highest level since November 2021.

“The credit growth for the past month or so is higher than pre-pandemic levels. Moreover, the June quarter results have shown that net non-performing assets have come down,” observes Chokkalingam.