Foreign ownership in Indian stocks is at its highest level in the quarter ending June, says a report from Citi Research by analysts Aditya Narain and Jitender Tokas. Foreign ownership gained 47bps, “a sharpest ever +368bps in 4 running quarters”, making it an all time high of 21.7 percent.

indian equities

Foreign Institutional Investors (FII) own about 48 percent of India’s free-float, which comes around $220 billion in equities. In the last two months, FIIs have sold more than $2.7 billion worth of Indian stocks, indicating that India’s problems “might not yet have topped.”

Indian equities: Changing trends

During the second quarter, foreign investors continue with their investment in the Indian market while the local investors were more inclined towards selling. However, in recent months, there has been a change in trends with foreign investors limiting their investment, even negative net investment for June and July. On the other hand, domestic investors have also slowed on selling, and positive in June. Even with changing trends, the numbers still are far from a match with FII’s holdings being 2.4 times of domestic, and flows being 1.6 times. This difference, the analysts believe, “could well continue to dampen sharp one-way market moves.”

Sectoral divergences increasing

According to analysts, FII’s were a bit defensive in their investment in the quarter ending March, but, in the quarter ending June, a rally in the rates changed the stance of the FII’s, “raising OWs” in industries like financials,  consumer discretionary and industrials.

At a time when FII’s have taken the opposite position in two quarters, domestic investors have moved from being defensive to ‘more defensive’, with investments in IT, staples and energy. Such difference in positions of FIIs and domestic investors resulted in “widening sectoral divergences.”

But quarter to date (QTD) performance, showing inflows of $26.4 billion in LTM, with top 3 OWs being consumer discretionary, financials, and materials and -9 percent LTM in currency, reflects that FII’s portfolio returns are getting adversely affected.

Foreign ownership is narrowed to top 100 Indian stocks

Though foreign ownership has increased in Indian stocks, it remains largely concentrated in the top 100 stocks, at almost 86 percent. Also, 61 percent of  investments targeted the top 30 stocks. This bias towards top stocks supported the stock market and protected FII’s investment, but “at the top of absolute ownership and stock concentration levels it could also spell trouble,” believe the analysts.