The original phrase was “When Paris sneezes, Europe catches a cold.” And was penned by Austrian politician Klemens von Metternich (1773-1859) at the time of Napoleon.
In the last few years, any reference to an increase in interest rates in the US led to a short-term rout in stock markets of many countries including India, and thus the acceptance of the above phrase on Fed sneezing.
These words and the reactions of markets over short periods when flows decide the pace and direction of the market led to the popular perception among many Indian investors that foreigners are smart as they dominated the buying and selling over the past many years.
Some of the investors blindly follow what the foreigners do to decide their own approach to the market. While the perception could be that foreigners are smart, the reality is that in years when foreigners have sold, domestic investors have bought and earned handsome returns.
Foreigners have been net sellers in only four calendar years since 2003. As the table below shows, the prospective one- and two-year returns suggest that foreigners tend to miss out on prospective returns when they sell out.
There could be multiple reasons for this – one possible reason could be that foreigners are forced to sell for reasons that are not really connected with India for e.g., during the global financial crises, the Indian economy was not seriously impacted as it does not have significant manufacturing exports, but the foreigners sold off succumbing to other pressures in their home market.
They may have sold either because they had an alternative to India or because they do not understand India, or they may have faced redemption pressures from their clients.
Eventually, the Indian economy bounced back well, and the stock market returns in the subsequent years were good and the domestic investors who had invested in 2008 benefited.
If history is any indication, then chances are Foreigners selling out this year are likely to miss an opportunity – even as local investors continue to invest and potentially cash in on the future.
As the table indicates for CY22 foreign investors have sold to the tune of USD 22 bn while domestic investors have invested USD 33 bn through mutual funds and insurance companies.
A surge in domestic flows has been one of the key reasons for the resilience of Indian equities in 2022 despite record selling by foreign investors.
Indian households remain significantly underinvested in equities and its rising share should create a buffer to absorb volatility created by foreign flows.
The other factor is that the developed world is battling unprecedented inflation and interest rates not seen since 2007. Indian companies and markets have seen and lived with high-interest rates and inflation.
The RBI has hiked rates by 190 bps has just got the repo rate and bond yields to normalised long-term averages.
Thus, despite rate hikes and uncertainty, Indian consumer sentiment is improving due to the broadening of economic revival as indicated by a survey conducted by CMIE (Centre for Monitoring Indian Economy) and RBI. Employment characteristic is also changing with labourers moving out of farming to more gainful employment.
All of this means that the corporate earnings numbers in the coming years could continue to be good.
The Indian economy should continue to grow by over 6% per annum over the long term, in real terms, just as it has over the past 42 years.
This growth would generate investment avenues and create the opportunity to make sensible, long-term returns.
Short-term returns could be a function of trends in corporate margins, festive season sales, any capacity expansion plans announced by the private sector, and the flows from investors.
The economy is on a natural path of recovery and unless there is a need for cash, it might be prudent to stay invested.