The Nifty 50 managed to weather the storm triggered by Russia's invasion of Ukraine in last week of February 2022 and edged up from a seven-month low, managing to test the 17,000-mark in mid-March 2022. Overall sentiments remain volatile. Exactly after two years of the start of Covid-19 pandemic, which threw the investing world in a tailspin due to the all-pervading impact on businesses and consumers alike, stocks preferred by FIIs and MFs in this era deserve attention after recent decline in market.

There are two reasons why this is critical from the investing point of view. First, overseas portfolio investors or the FIIs bought in stocks heavily in the aftermath of the meltdown in stock markets in March-April 2020. The buying spree continued for at least a year before the FIIs altered their stance and started selling local stocks. However, on a net basis, FIIs were still buyers in Indian equities in CY 2021. So, effectively, FIIs bought a total of nearly Rs 2 lakh crore of Indian stocks in last two CYs, i.e., around Rs 1.70 lakh crore in CY2020 and Rs 26000 crore in CY 2021.

The last few months have been challenging for the local markets. There has been heavy selling pressure from the overseas investors. As per NSDL data, FPIs have now been net sellers of Indian stocks for more than five consecutive months. Such a selling streak was last seen during the global financial crisis of CY 2008, when FPIs were net sellers for around seven months. Since of the current fiscal, FPIs have pulled out funds of around Rs 2.70 lakh crore in the equity cash segment, which is significantly higher than the cumulative money pumped in post the pandemic during May 2020-March 2021. A part of it has coincided with the shift in the US monetary dynamics, while profit selling after the heavy buying in earlier quarters could also be a part of the reasoning.

The US Fed announced a 0.25% increase in its benchmark policy rate for the first time in three years. The selling spree could very well reverse in a quick time given that just like the global financial crisis, the current events unfolding at the global stage and the panic selling in world stocks is linked to a pure external phenomenon for the Indian equities. FII flows can be highly volatile and when the tide turns for good, they can make up for the lost time very quickly.

Stocks were not just chased by the FPIs. Even local institutions were increasing their stakes in them. This is significant given that the last two years saw a massive inflow of funds in local mutual funds. Assets managed by the Indian mutual fund industry have increased from Rs. 32.30 lakh crore in February 2021 to Rs. 38.56 lakh crore in February 2022. That represents 19.40 % increase in assets over February 2021. The proportionate share of equity-oriented schemes is now 48.2% of

the industry assets in February 2022, up from 41.9% in February 2021. The AUM stood at Rs 37.92 lakh crore in December 2021 compared to around Rs 26.50 lakh crore in December 2019.

The broad trends have always tilted in favor of considerable increase in the inflows in MF given the rising focus on financial wellness and inclusion. But the staggering surge in SIP related inflows throughout the pandemic era has ensured that the local MF investing cycle has turned around decisively. The net inflows in open ended equity mutual funds in last two CYs stood at Rs 1.06 lakh crore.

Equity funds witnessed a fall in inflow in January 2022 at Rs 14,900 crore, compared to Rs 25,082.54 crore in December 2021, though this was mainly due to fewer new fund offers (NFOs). SIP accounts crossed five-crore after 26 lakh fresh accounts were added during January 2022. Meanwhile, the net inflows into open-ended equity-oriented mutual fund schemes resumed their upward trend in February, clocking in around Rs 19700 crore.

Mutual fund investors have also been helped by continued increase in regulatory scrutiny and an increased focus on transparency and clarity. The Securities and Exchange Board of India (Sebi) at its recent board meeting mandated that trustees of the fund obtain consent of unitholders when they decide to wind up a scheme prematurely to redeem the units of a closed-ended scheme. Further, the trustees need to obtain the consent of unitholders by a simple majority of unitholders present and voting based on one vote per unit held and publish the results of voting within 45 days of the publication of notice of circumstances leading to winding up.

In case the trustees fail to obtain consent, the scheme will open to business from the second business day after publication of the results of voting. Sebi also approved amendments to the mutual fund (MF) regulations to mandate MF schemes to follow Indian Accounting Standard (Ind AS) from FY2024. Further, the board approved amendments to MF regulations with respect to accounting-related regulatory provisions to remove redundant provisions and bring in more clarity.

Sebi also restored the six-month validity period of the observation letter given to mutual fund houses by the markets regulator to launch new fund offers (NFOs). Due to the market turmoil caused by covid-19 last year, Sebi in March 2020 had relaxed the validity period of the observation letter given for launching NFOs to one year from six months. Sebi's recent regulations regarding skin in the game have also come at an apt time given the sharp spurt in retail investors' interest in stock investing. There were a total 11.16 crore accounts in the mutual fund industry on September 21, of which 90.6% is accounted for by retail investors.

The global scenario is uncertain. The ongoing Russia-Ukraine war clubbed with the anxiety over elevated commodity prices and monetary policy direction could mean that the markets will continue to see a volatile trend in coming months. Stocks chased by FIIs and MFs during the testing times seen in last two years will mostly be in focus over this phase. The effective increase in holdings of large investors during this period which was filled with despair followed by delight for the markets presents us with a large list of stocks.

In total there are 154 companies in which the FIIs and MFs both have increased holdings when we compare data for quarter ending December 2021 to quarter ending December 2019. However, to bring in more clarity to the picture, we also look at the returns in the stocks over not just last one or two years but three years. Stocks not providing positive returns over a three-year period are omitted from the list. This leaves us with a list of 141 counters.

Outlook

Out of the 141 stocks, more than 50% are trading at a P/E lower than their 5 year average PE due to the recent correction in broad markets.  There are 9 stocks in which the FIIs holdings have increased more than 10% over last two years. The highest FIIs holdings increase of 16.55%  is seen in Amber Enterprises, a prominent provider for Air Condition OEM/ODM industry in India. For MFs, the highest increase in stake over these two years stands at 22.14% for Gokaldas Exports. There 7 stocks in which FIIs are holding more than 30% stake as of December 2021 quarter, viz. Crompton Greaves, M&M, ICICI Bank, Phoenix Mills, Indian Energy exchange, HDFC Life and Metropolis Health.

Not all the counters in the list have had a rosy time in last one year. A total of 27 stocks have turned in negative returns over the last one year ending 25th March 2022. Out of this, 13 counters have lost more than 10% in last one year. This is interesting and also indicates that the FIIs and MFs, despite having a much wider time frame for their holdings, could likely to trim exposure to some of these counters if their underperformance continues. Hence, more focus should be placed on counters providing positive returns for all three years under consideration. Out of 141, 113 counters have provided positive returns on a 1,2 and 3 year basis and thus, offer a fairly sound set of investable stocks with growing interest from institutional investors in both India and overseas.

With the inflows in equity mutual funds remaining firm in first two months of current year and the economy opening fully, there is a continued likelihood that the domestic MF inflows in equity space will continue to be strong in coming months.

However, there is still plenty of cautiousness given the Russia-Ukraine war and highly elevated crude oil prices. India's projected economic growth for 2022 has been downgraded by 2.1% to 4.6% by the United Nations in a latest update. India will face restraints on several fronts: energy access and prices, primary commodity bottlenecks, reflexes from trade sanctions, food inflation, tightening policies and financial instability, the UN has noted. This is still way better given the overall shake up in world economy following the recent global turmoil. The UN's trade and development body has downgraded its global economic growth projection for 2022 to 2.6% from 3.6% due to the Ukraine war and to changes in macroeconomic policies made by countries in recent months.

The monthly flows thorough SIP will likely continue unabated as the economic picks up strength, and the job market improves. The Reserve Bank of India (RBI) stated in its latest monthly update that the ongoing geopolitical crisis has heightened the uncertainty clouding the global macroeconomic and financial landscape even as the world economy struggles to recover from the pandemic.

Amidst these testing times, the Indian economy is experiencing spillovers as it recovers from the third wave of the pandemic. Consumer and business confidence are rising alongside improvement in demand conditions. On the supply side, a resilient farm sector and a sustained retrieval in both industrial and services sectors are broadening the recovery. Spiraling oil and gas prices and unsettled financial market conditions pose fresh headwinds to the still incomplete global recovery. Amidst these testing times, India is making steady progress on the domestic front as it recovers from the third wave. India's macroeconomic fundamentals remain strong.

The sentiments also seem to be turning around when it comes to FIIs after a near 16% correction in benchmark Nifty50 from its all-time high of 18600 in October 2021 to a multi month low of 15670 in first week of March 2022. The index has edged up despite looming uncertainty in geopolitical space and consistent increase in crude oil prices. The WTI crude oil prices have averaged around $112 per barrel in first three weeks of March 2022 compared to an average of $94 per barrel in February 2022.

The US Fed has already showed an inclination to go a little easy in its monetary policy normalization as it raised the benchmark rates by 25 basis points in its March 2022 meeting compared to earlier expectations of 50 basis points. The Nifty 50, despite its recent down move, is up around 19% on a year ago basis, compared to returns of 2.37% for Brazil's Bovespa, -3.50% for Chinese Shanghai Composite and a staggering -28% for Russia's Moex.