REIT outflows surpass 2008 global financial crisis as Fed policy shift nears

The rate at which foreign portfolio investors (REITs) are selling their holdings is one of the worst the Indian market has seen. Analysis by brokerage firm ICICI Securities shows that total 12-month (TTM) REIT sales of $36 billion is higher than the $28 billion recorded during the 2008 global financial crisis.

Foreign investors have stepped up selling since October, expecting the US Federal Reserve to make a hawkish turn due to inflation in the United States. The sell-off accelerated after Russia attacked Ukraine on Feb. 24 and caused a spike in global commodity prices, especially oil. Since October, REITs have taken nearly $20 billion out of domestic equities, while net sales over the past month are around $9 billion.

However, despite strong sales, domestic markets have been relatively resilient. Since its peak in October, the benchmark Sensex has lost up to 15%. It is currently trading within 10% of the October high of 61,766.

The impact of the sale of REITs during the 2008 crisis was worse, causing the benchmark Sensex index to fall nearly 70% from around 20,800 in January 2008 to 8,500 in October 2008.

The relatively shallow correction was driven by strong inflows from domestic institutional investors (DIIs), which injected $28 billion on a 12-month basis.

As a result, net institutional outflows from the TTM at $8.2 billion (FPI + DII flows) are currently lower than the peak 2008 crisis exit of $8.6 billion, according to ICICI Securities. Additionally, if REIT investments in the primary market (mainly IPOs) are added, TTM outflows drop to $18.3 billion.

The strong inflow of DII is explained by a sustained inflow into mutual funds (MF), in particular the route of systematic investment plans (SIP). On a monthly basis, SIPs are seeing inflows of over Rs 10,000 crore.

“We are seeing consistent buying by domestic investors in the face of unprecedented selling by REITs during rare and extreme fear events seen in recent years (covid pandemic and global crisis due to the Russian-Ukrainian conflict ). This is a clear positive surprise and heralds the structural deepening of domestic equity savings in India,” said Vinod Karki, equity strategist at ICICI Securities.

“Such aggressive buying behavior during falling stock prices by domestic investors should result in better long-term outcomes for their portfolios compared to buying in a phase of high market optimism, and so triggering a virtuous cycle. However, the corollary of the above is that the expectations of finding huge stock price bargains seen in previous REIT sell-offs will be disproved going forward,” Karki said.

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