Will FIIs continue to remain angels for Indian markets? - The 5 Minute WrapUp by Equitymaster
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Will FIIs continue to remain angels for Indian markets?

Jan 3, 2014

In this issue:
» Manufacturing PMI decelerates
» What lies ahead for real estate sector
» How will IT firms fare in 3QFY14?
» Are interest rates likely to soften in 2014?
» ...and more!

The year 2013 will be remembered for some interesting contrasts. The domestic economic growth slipped to a decade low during the year. It was the third worst year for the rupee in a decade. Muted demand, high inflation coupled with high debt plagued India Inc.

Such was the crisis that the latter's default rate touched 10 year high. However, it was also the year when stock markets over stretched the meaning of liberalization and broke free of economic fundamentals. Despite bleak prospects of the economy and no likely triggers in the near term, Indian stock markets kept singing a different tune and touched record highs. A big driving factor for the new highs was the foreign money inflow. As per an article in Economic Times, since liberalization, the Foreign Institutional Investors (FIIs) investment in the last four years ending December 2013 is more than the combined investment in years from 2001-2009. Even the boom years did not elicit that much interest as was seen in the times of slowdown. The outcome is that FII holding in Indian stocks is touching peak levels. Now that the FII investment has touched or is close to the ceiling, will the further dominance of FIIs in the Indian markets be restricted?

As per the article, this is unlikely to happen. Instead of limiting the FIIs, the companies and markets will adjust in order to support the trend. Few of the ways to accommodate FIIs will be to increase FII ceiling or a selloff of the promoter's stake. It is important to note here that while FIIs are allowed to directly invest up to 24% in Indian companies, the upper limit is higher in many sectors. So far, the FIIs have mainly invested in the large cap stocks and country's largest blue chips. Hence, another possibility is that they may start picking stocks beyond the top 100 on NSE or BSE in terms of market capitalization. This may add to the liquidity of such stocks.

However, we believe that all these developments are likely to make investment in stocks more risky. This is because while high promoter holding adds comfort and safety to the investments, high FII stake makes them highly volatile. While FIIs have boosted the Indian stock markets, they have also added to the volatility in the markets and made them highly risky. The money coming from FIIs, also called hot money for being so unstable, can get sucked out anytime leading to collapse in the markets. Especially now when the US has announced a taper and when uncertainty rules in India with elections scheduled this year. We hope that greed for FII money will not rule the markets. Instead, focus should be on reforms to make India more investor friendly so that real growth and long term investments, including those from foreign players can be ensured.

Do you think that high FII money inflow poses huge risks to Indian stock markets? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
Purchasing Managers Index (PMI) measures the state of economic activity. It is based on a survey of private sector firms. Any value above 50 indicates expansion in economic activity while a reading below 50 indicates contraction. As can be seen from today's chart, the PMI index for the month of December fell to 50.7. This was mainly due to sluggishness in domestic orders. While the reading was above the benchmark figure of 50 it fell when compared to the last month. This indicates that the recovery is still lagging and achieving higher growth in future could be a challenge. However, the good news is that new export orders have picked up and inflation is showing signs of moderation. This may prompt RBI to lower rates in order to revive the economy. However, slowdown in new orders, as indicated in the survey, is not a good a sign. It shows industrial capex is still lagging. Order back log has also increased which means there is inventory buildup. Unless RBI lowers the interest rates, new orders will continue at snail pace as demand will remain weak. This will delay the capex cycle and hurt economic growth.

Manufacturing PMI Decelerates Due To Weak Demand

Investors in Indian real estate have had a rough ride in 2013. The sector has been mired in speculation of a steep correction in the offing. Piles of unsold inventory, economic instability and firm interest rates kept the real estate market away from fresh dozes of liquidity. In 2014 too the fortunes of the sector are unlikely to look up. As per an article in Firstpost, a great degree of political uncertainty, liquidity issues overseas and cautious sentiments are expected to underpin the sector.

The last housing bubble seen in 2008 in the US reminds us of cheap money flooding the mortgage market. This in the hope that housing prices can only go higher. Since the housing bubble burst in 2008, interest rates in the US have hardly gone higher. But a lot of the cheap money has flown into real estate markets in emerging economies. With a possible Fed QE taper, the chances of Indian real estate market being hit hard remains high. And therefore investors need to be very cautious about investing in the sector at frothy valuations.

The New Year heralds the start of the third quarter results season and as always, software firms will be the first of the block. Infosys will declare its 3QFY14 results on Friday 10th January to kick off the earnings season. For the Software sector, the third quarter is usually a weak one due to seasonal factors. While Indian IT firms are expected to post good results, the pace of growth on a quarterly basis, could slow down. As per a leading financial daily, a host of factors could prevent IT firms from repeating their stellar performance of the last quarter i.e. 2QFY14. The reasons include, fewer number of working days in the US and Europe due to the holiday season and a stronger rupee. The Indian currency has appreciated about 1.4% in the quarter gone by and this could have a negative effect on margins. Despite these issues, Indian IT firms are seeing improved demand from key markets and this will hold them in good stead during 2014. While seasonal issues will always play their part, long term investors should not pay too much attention to them as they do not affect the fundamentals of these companies in a big way. Far more important would be company specific factors like deal wins and operating margins. These would separate the winners from the losers in 3QFY14.

Are interest rates likely to soften in India in 2014? Certainly not if a few experts are to be believed. Talking to a leading business daily, they seem unanimous in their view that a reversal in the interest rate cycle is definitely not on the cards this year. On the contrary, they think that there's a strong possibility of one more rate hikes before normalcy returns. These people couldn't have been more right we reckon. According to us, two things play a central role in bringing inflation down in India. This is better capital allocation by the Government and improvement in the supply chain management. Unfortunately, there are no signs that these two factors are seen at with the all the seriousness they deserve. On the contrary, there is a possibility of the Government indulging in more wasteful expenditure. Besides infra structure investments are showing hardly any progress at all. Therefore, inflation control will almost be next to impossible according to us without a significant improvement on these fronts.

In the meanwhile Indian equity markets have extended their losses and are trading at day's low. At the time of writing, the benchmark BSE-Sensex was down by 105 points (-0.5%). Power and Capital goods stocks were the biggest losers. All the Asian stocks were trading weak led by China and Hong Kong. The European markets opened on a positive note.

  Today's investing mantra
"Go for a business that any idiot can run- because sooner or later, an idiot is going to run it." - Peter Lynch

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4 Responses to "Will FIIs continue to remain angels for Indian markets?"


Jan 4, 2014



Shyam Sunder

Jan 4, 2014

Yes & after May-2014 Government



Jan 4, 2014

Think that FII money is very opportunistic and does not have the interest of India's growth and prosperity at heart. One definitely needs to keep some strong regulatory mechanism in place to act as a check and balance against their greed and unethical dealings.



Jan 3, 2014

Yes , it is!

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