'FPI apathy toward PSU stocks': Why foreign investors still prefer traditional favourites

PSU stocks have delivered solid returns in the past one year, with the BSE PSU index delivering 88 per cent return for the period. Yet, foreign portfolio investors are not so bullish on the segment, as suggested by a study by Kotak Institutional Equities on the BSE-200 pack.

Kotak said FPIs continue to prefer their traditional favourites such as largecap private banks, consumers and IT services stocks. "These sectors have been laggards in the strong rally in the Indian market over the past 3-4 years, with many of the largecap stocks being massive underperformers," it said.

The domestic brokerage said FPIs' apathy toward PSU stocks, based on past experience and adherence to ESG principles, may have precluded them from participating in many high-return stocks.

HDFC Bank Ltd, Reliance Industries Ltd, ICICI Bank Ltd, Infosys Ltd and Bharti Airtel Ltd are top five FPI portfolio stocks. Axis Bank Ltd, Tata Consultancy Services Ltd (TCS), Kotak Mahindra Bank Ltd, Larsen & Toubro Ltd (L&T) and Mahindra & Mahindra (M&M) are their other top bets.

"In our view, the narratives and fanciful valuations surrounding many of the fancied stocks in the automobile, capital goods and PSU sectors will not stand even a modicum of scrutiny. We are surprised at the vehement conviction of certain investors about
these stocks," the domestic brokerage said.

Kotak said FPIs seem to have taken a negative view on Indian equities, as seen from large
outflows in the past few weeks.

"We attribute the same to their perception of unfavorable risk-reward balance in India and better returns elsewhere, especially China. FPIs have been anyway less active in India for a while due to low inflows into EM funds and high share of passive flows, full-to-rich valuations across sectors and low interest in outperforming ‘narrative’ stocks," Kotak said.

India’s weight has increased steadily in the MSCI EM Index, but active GEM funds have stayed underweight, it noted.

"We can only hope that there is no untoward incident to jolt the market out of its ‘riskless’ mode. The market has seen increased volatility of late, linked to fluctuations in expectations around the outcome of the ongoing national elections. It is quite evident that the recent correction in many ‘narrative’ stocks can be hardly called a correction in the context of the massive returns in the stocks over the past 6-12 months," Kotak added.