Jefferies' Chris Wood: U.S. Market Losing Its Grip, Asia and Defence Stocks Gain Ground
Foreign Investors Pivot from Largecaps to PSUs and Smallcaps in Q4 FY25

In a notable shift during the March 2025 quarter, foreign institutional investors (FIIs) have reduced their exposure to large-cap stocks, redirecting their investments towards public sector undertakings (PSUs) and smallercap companies. This strategic realignment reflects a growing preference for undervalued and domestically focused assets amidst global economic uncertainties.
Decline in Large-Cap Holdings
Data shows that about ₹1.34 lakh crore has been withdrawn by FIIs from Indian equities in 2025 so far, aggravated by the plunge in the major indices. The Nifty index, so far, has been down by around 4.64% year-to-date, whereas the Sensex dipped by 4.5%. The broader markets have taken the hit harder: the Nifty Midcap 100 index has declined more than 13%, while the Nifty Smallcap 100 index plummeted as much as 18%.
Analysis of shareholding patterns reveals that FIIs decreased their stakes in a significant portion of largecap companies. Specifically, among the 36 Nifty50 firms that disclosed their March quarter data, FIIs increased holdings in only five, reducing their positions in the remaining companies. Similarly, in the broader Nifty100 index, nearly 73% of the 73 constituents reported declining FII ownership.
This market sell-off can be attributed to various catalysts: high inflation, rising interest rates, and concern regarding India's gradually slowing economic growth. The 'Sell India-Buy China' theme has momentum, with investors redeploying money into Chinese markets and showing signs of recovery. With the onset of October 2024, India's market capitalization has decreased by around $1 trillion, while Chinese market capitalization, on the contrary, has soared by $2 trillion.

Renewed Interest in PSUs
As FIIs withdrew, domestic institutional investors took the plunge to cash in on the lower valuations. In less than two months of CY25, DIIs poured nearly ₹1.29 lakh crore into the system, almost giving some support to the markets. This counterbalance had gone a long way in cushioning the blow from FII outflows and firming investor sentiment.
Conversely, while FIIs have shunned largecaps, they have shown renewed interest in PSUs. Data show that FIIs have increased their holdings in 52% of the 79 PSU companies that have reported their data for the March quarter. Most of these stocks have seen significant corrections, some falling over 50% from their 52-week highs, and thus are regarded as attractive valuation opportunities.
Analysts believe that FIIs could be averaging down their earlier holdings to take advantage of some low valuation benefits. This strategy, however, does show that they have confidence in the underlying fundamentals of PSUs despite seeing lots of volatility in their previous performances.
Shift Towards Mid and Smallcaps
FIIs have also been active in the mid and smallcap segments. In the Nifty Microcap 250 Index, 51% of the 186 companies saw an increase in FII holdings. Similarly, 43% of BSE MidCap and 42% of BSE SmallCap companies reported higher foreign investor interest.
Often perceived as riskier, these segments attract FIIs seeking alpha, i.e., returns exceeding benchmark indices. Despite revenue and margin visibility concerns, many mid and smallcap companies are domestically driven and less exposed to global uncertainties, making them resilient in the current economic climate.
Strategic Realignment Amid Market Corrections
Foreign institutional investors (FIIs) sold more than ₹1.16 lakh crore worth of Indian equities during the quarter, which resulted in insignificant declines in large indices like the Nifty (-0.5%) and Nifty100 (-1.8%). However, the BSE MidCap and SmallCap indices corrected more sharply at over 11% and 15%, respectively. FIIs perceived this event as an opportunity to buy quality stocks cheaply.
Independent analysts have openly noted that FIIs seem to be employing a two-pronged strategy: investing defensively in domestic-centric PSUs and scouting for alpha in relatively unnoticed midcaps and smallcaps. Such a stance can very well be equated with that of domestic retail investors—both eyeballing potentially strong long-term gains.
Selective Large-Cap Investments
But, while the overall trend indicates a move away from large caps, FII has selectively increased stakes in specific companies, such as Bharti Airtel, whose FII holding grew by 1.1 percentage points to 25.41%, and Bajaj Finance, which increased by 0.7 percentage points to 21.45%. Wipro also saw an increase of 0.5 percentage points to 8.35%, while IndiGo increased by 0.3% to 25.11%.
Such investments indicate that FIIs are not decamping from large caps but are focusing on companies with sound fundamentals and good growth prospects.
Market Outlook
Money flows into PSUs and smaller-cap stocks, which, as FIIs rebalance their portfolios, should bring more diversity and resilience to the investment universe.
This fresh wave of investment pattern changes speaks of an evolving environment for global capital flows and the consequent need for strategic asset allocation. As largecap stocks come unstuck, the renewed interest in PSUs and smallcap companies demonstrates potential growth and resilience pockets within the Indian market. Going forward, both foreign and domestic investors will need to realign themselves to gracefully meet ever-evolving challenges arising from changes in the economic milieu.
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