FPIs stay bullish on growth stocks, cut defensive bets a bit

Foreign portfolio investors have been heavily selling Indian shares in the run-up to the general elections. But what’s notable is FPIs have been paring their holdings of defensive stocks instead of those with more growth potential. This shows they remain bullish on the sustained earnings potential of growth stocks in industries like discretionary spending and manufacturing.

Data from NSDL shows the weight of defensive stocks such as FMCG, IT, and healthcare fell to a multi-year low of 19.72% as of May-end.

Defensive sector weightage in FPIs’ equity folio declined by 2.89 percentage points in the 12-months to May 31, from a peak of 25% a few years ago. In the same period, the equity portfolio value of defensive stocks fell by 3.3% from the year-earlier period to $192 billion, while FPIs’ total equity value rose by 8% to $797 billion.

FPIs sold $1.55 billion (₹12,865 crore) worth of Indian FMCG shares since January and turned sellers in nine out of 10 fortnights this calendar year. Similarly, from the IT sector, FPIs sold $1.23 billion in the same duration and were sellers in eight of the last 10 fortnights in 2024. Overall, FPIs were net sellers of $2.77 billion till May.

However, FPIs were net buyers in power, realty, telecom, capital goods, and auto sectors, which offset outflows from defensive sectors. Capital goods saw the highest net buying at $2.16 billion with rising peak power demand touching a record high of 250 GW in May, which will benefit capital goods makers due to increasing power capex. India would need to double its power sector capex in the next one year to bridge supply deficit compared to the previous six years.Meanwhile, the outlook for the defensive sector remains dim, with private consumption growth muted at 4%, lagging GDP growth for the sixth quarter in a row. Consumer staples producers’ revenue increase was 3.7% in the fourth quarter of FY24 on a like-to-like basis as price cuts weighed on growth. Demand conditions have largely mirrored previous quarters’ trends.However, select companies saw green shoots in rural markets and were optimistic on the outlook amid hopes of a good monsoon this year and improving macroeconomic conditions. In the IT sector, firms have cut growth forecasts due to anticipated weak demand and uncertainty on the macroeconomic front. Consequently, both growth and margin expectations for this fiscal have been adjusted downwards, resulting in subdued growth forecasts across the board and a less favourable margin outlook for specific companies.

Expectations for recovery have been deferred to FY26, and revenue growth projections for FY25 lagged expectations.