In the charts: India’s best performing stock market of 2021 is down 8% from its peak

NEW DELHI: After being the best performer regionally in 2021, the Indian stock market has fallen 8% from its peak as the country faces multiple headwinds, such as the escalation of the Russia/Russia conflict. Ukraine driving crude and commodity volatility, rising inflation, tightening US yields as well as downside risks to earnings, HSBC Global Research said in a report.
External factors continue to pose a significant risk to India’s investment case. If crude remains above $100, it would pose a key macroeconomic challenge for India, HSBC said. Second, rising US bond yields and the end of easy liquidity are also negative, although this is not unfamiliar news. The geopolitical situation presents its own uncertainty, but if progress towards peace is visible, it may also present an upside risk, he said.

Market breadth contracted 40% (% of FTSE India shares that are above 200DMA), the lowest since the massive sell-off caused by COVID-19 in 2020, he added. 77% of FTSE India constituents are trading below their 200DMA, which seems to suggest a sharp decline is unlikely unless an extreme event occurs, said Amit Sachdeva, India Equity Strategist, Consumer & Retail Analyst at HSBC.

India has seen around $19 billion in FII outflows since the peak in October and around $15 billion in outflows since the start of the year. And currently, FII is moderately underweight India, with an 18.5% stake. The largest FII outflows come from financials (nearly 50% of global FII outflows), followed by IT and consumer staples.
India saw a higher decline in FII, relative to its regional peers, given its high valuation and the risk of sustained high crude prices hurting its macro story.
India has witnessed most of the capital outflows seen in Asian emerging markets

If the geopolitical uncertainty continues, FIIs could sell an additional $7 billion to $8 billion worth of stocks, reaching levels seen during the global financial crisis, HSBC noted. Nonetheless, stronger DII flows to provide some cushion to the market, as domestic institutional inflows have already been an offsetting factor, with $21 billion in inflows since October 21. Retail flows, both directly and through systematic mutual fund investment plans (SIPs), supported the broader market, offsetting relentless FII selling, the report notes.
Retail feeds, both directly and through mutual fund systematic investment plans (SIPs), supported the broader market amid relentless FII selling. In fact, monthly SIP flows are up nearly 30% from pre-Covid levels.
The sectoral breakdown of FII flows suggests that the finance and information technology sectors accounted for more than 80% of total FII outflows, followed by consumer staples.
Consumer Discretionary, Real Estate and Utilities are the only sectors to have seen positive FII flows over the past 5-6 months.
Strong FII outflows reduced FII fund holdings of Indian equities to 18.5% (as a % of market cap), the lowest since January 2017. started to increase, but are still below March 2020 levels.