FII flows have turned sharply negative since middle of 2017 – and continued as such into 2018 as emerging markets became weak. While there have been a large amount of reasons for this, we may have missed out one key technical factor – that the FIIs have never seen markets above 2008 levels – which is where we were in mid 2017! Why tread uncharted waters!
CHART: NSE 50 USD TERMS
As the chart above shows, the USD NSE 50 Index was at 5500 levels at its peak in January 2008 before the markets tumbled- this level was reached again middle of CY2017 (green line)- and presented a large technical barrier.
The index is currently around 5100 levels where the chart shows several resistance points (red line) and we have therefore had largely negative flows continuing.
What Happens Now
For FY 2020, consensus estimates for the Nifty are at Rs 643 EPS – discounting it by the 10 year average Forward PE of 17.2x and assuming a miss of 10% (historical median miss – actual vs estimates) on EPS estimates, we get a level of 9900 on the Nifty. Assuming the INR stabilises at 71 or so – and therefore doesn’t present a challenge as thats where we are now, 4750 on the USD Nifty may be levels where the FIIs may come back in (5% down from here on Nifty – 9900 vs 10500 – means Nifty USD has to be about 4750 levels).
And if the INR were to go back to 75, we may be looking at levels of 9405 on Nifty or 4500 on Nifty USD.
Why 75 USDINR? Thats because that’s the 12M forward rates being contracted to at the beginning of November 2018 as well as forms the extreme bear scenarios in some recent surveys.
Fundamentally therefore we are looking at a 1000 point downside from a Dollar Nifty perspective before FII flows resume – which traditionally marks the beginning of stability in the Nifty. All this action may happen in the next few months as internationally, the USD breaks out/down from its 6 month DXY range of 94- 96 AND/OR emerging markets resume specific trends as stability returns to global trade.
Oh – lest we forget!
Seems FIIs havent made a single rupee on Indian indices since January 2008! The Rupee Nifty index then was 6000 odd and the INR at 39 – the Rupee Nifty Index currently is at 10500 and the INR at 71.15 – so while the Indian indices have gone up 75% since then , the INR has depreciated by 82%!