Ouch! FIIs break 2008 record

“Records are meant to be broken” goes the truism and looks like the Street just did that. With just a week to go before the seventh anniversary of the fall of Lehman Brothers, foreign institutional investors in this calendar year have surpassed two records set in the fateful year of 2008. To begin with, the August selloff this year has broken the record monthly net outflows seen in January 2008 and, secondly, in just a little over a month [whole of August and 9 days of September], FII net sales have surpassed the entire December quarter outflows seen post the collapse of Lehman Brothers.

At ₹16,877 crore, the August selloff this year, is the highest-ever monthly sales seen since 2008, when in January, foreign investors sold over ₹13,000 crore worth of equities. In fact, if we combine both the equity and debt net sales, the number for last month stands much higher at over ₹17,500 crore against over ₹11,000 crore seen in January 2008. This is because FIIs sold debt paper worth ₹647 crore this August, while in January 2008, they had pumped in over ₹1,900 crore into debt paper.

Monthly FII equity + debt flows (₹ crore)

Similarly, while the fateful December 2008 quarter saw equity outflows of over ₹16,000 crore, between August and September 9, FIIs pulled out over ₹22,500 crore from equities. Interestingly, the Sensex has declined over 9% in these 40 days against a 25% decline seen in the December 2008 quarter.

The only difference between 2008 and now is that, in the first eight months of CY15, FII flows are still net positive at over ₹27,500 crore, while over the same period in CY08, the number was a negative ₹28,000 crore.

But with four months still to go before the year ends, foreign outflows are unlikely to abate with both earnings growth and economic recovery still in question. Though the market has bounced back in the previous two sessions, there is still some uncertainty around the September 15-17 meeting of the Federal Reserve. While the International Monetary Fund has downgraded its growth forecast for the US and urged the Fed to consider delaying a rate hike until 2016, at the annual retreat in Jackson Hole last month, top Fed officials reiterated their desire to raise interest rates. Besides, the Chinese slowdown continues to weigh over global markets with investors turning wary of emerging markets (EM), including India.

According to EPFR, the US-based agency that tracks flows and allocations of funds domiciled globally, EM portfolio flows have already fallen to a year-to-date low of $4.5 billion in August. In fact on August 24, when a near 9% fall in the Chinese market sent global equities and commodity prices tumbling, seven EMs saw outflows of $2.7 billion, the same magnitude seen on September 17, 2008, during the week of the Lehman Brothers bankruptcy. Given that India-dedicated equity funds ended 2014 with record inflows in excess of $5 billion, the FII selloff could prove to be the turning point.