FIIs increase stake in insurance, consumer, but cut stake in PSU banks, NBFCs in Q1; will the trend change?

 Despite the signs of deep stress in the economy, the equity market has been going higher since April. As the rally has been mostly liquidity-driven, FIIs repositioned their bets on stocks and sectors based on their outlook.

 

The COVID-hit June quarter of FY21 saw foreign institutional investors' (FIIs') holdings in Nifty500 companies at a near 5-year low, said a report by brokerage firm Motilal Oswal Financial Services.

Even though the FII holdings increased marginally in Q1 by 8 bps quarter-on-quarter (QoQ), it declined 130 bps year-on-year (YoY) to 20.8 percent.

FIIs reduced ownership by 68 percent in Nifty 500 and 74 percent in Nifty50 companies QoQ.

Insurance, consumer, oil & gas were among the sector that saw FIIs increase stake in them while PSU banks, telecom, technology were among the sectors in which FIIs reduced stake.

The coronavirus pandemic has come as an unprecedented disruption which has not only hit businesses but also opened some new avenues of opportunities. The companies which have gained momentum are likely to benefit the most from the COVID situation or government policies.

Will the trend sustain?

Despite the signs of deep stress in the economy, the equity market has been going higher since April. As the rally has been mostly liquidity-driven, FIIs repositioned their bets on stocks and sectors based on their outlook.

Experts find the trend of FIIs holding as rational and are of the view that there may be some changes in their holdings as and when the scenario changes.

"FIIs increasing stake in insurance, consumer, oil & gas, auto, healthcare, retail, capital goods, real estate is related to the theory of rotation. This is an ideal scenario where money flowed from sectors that outperformed in FY20 into laggard sectors like the ones mentioned earlier," said Arjun Yash Mahajan, Head – Institutional Business at Reliance Securities.

Mahajan said this trend may continue for another few quarters or even for the entire FY21 financial year as the outlook for these sectors is still relatively better off than PSU Banks, NBFC’s, private banks and telecom.

There are overhang issues such as NPA’s increasing for PSU Banks, NBFC’s and private banks; AGR related issues acting as a dangling sword for telecom, he said.

Mahajan believes sectors such as insurance, consumer, healthcare, retail and capital goods will continue to attract money due to changing trends due to the COVID-19 pandemic.

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Retail and consumer will continue to be essential and thus will continue to see growth as people will stock up for any unforeseen lockdown coming back again and retail is now the main platform for buying consumer products, Mahajan said.

Capital goods are getting a push and much-needed trigger from 'Make in India' and 'Make for the World' focus of the government.

In Mahajan's view, Oil & Gas sector should see continued support as we are nearing the winter season setting in over the next few months and that’s when we can and may see global oil prices going up again.

Besides, money flowing out from technology, cement, metals and utilities may be a short-term phenomenon, said Mahajan. We may see their attractiveness coming back soon.

"Technology and metals, to a certain degree, are dependent on the outcome of the US presidential election and after that, the US trade relations with China. If we see Joe Biden winning in November, we may see the technology sector negative newsflow relating to visa norms and other such issues going out of the window and also with a new president in the White House, the relations with China and trade war may be the past. So, technology and metals may see a rally post-November," Mahajan said.

Rusmik Oza, Executive Vice President & Head of Fundamental Research at Kotak Securities is of the view that among the sectors where FIIs have increased their holdings, there are reasons to be bullish on oil & Gas, consumer and insurance. Looking at a sharp pullback and rich valuations of Nifty50, the downside risk in sectors like capital goods, real estate, auto and retail is higher.

"The downside risk in these businesses comes from the sticky numbers of coronavirus cases which we are witnessing even after five months of its origin. The interim lockdowns witnessed in many cities could impact demand for these businesses," Oza added.

Oza expects some form of rotation in the coming quarters based on FY22 outlook and strategy of going more conservative from hereon.

He excepts higher flows into defensive sectors like consumer staples, telecom and technology in the next one or two quarters.

"Among the cyclical, we feel metals and cement could attract some FII flows because of the improved earnings visibility. If there is a sharp correction in between, then flows could shift more towards the beaten-down sectors," said Oza.

He is bullish on oil & gas, technology, cement, private banks, metals, utilities and consumer staples and bearish on sectors like automobiles, retail, healthcare, NBFCs and PSU banks.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com/SD Solutions advises users to check with certified experts before taking any investment decisions.