FIIs return to India. To do what?

Feb 4, 2011

In this issue:
» World food prices shooting up
» Fed denies policy is causing food rises. Shame-shame!!
» Kalam wants developed India by 2020
» India's coal shortage to wide - impact on sectors
» ...and more!!

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The Indian stock markets have had a bumpy start to 2011. The markets seem to be tracing the steps of a cardiac monitor that has gone awry. There are several reasons for it that include higher inflation rates, commodity prices hurting company results, higher interest rates and not to forget the infamous corruption scandals. But a major reason for the fall has been the FIIs, who have sold shares worth Rs 50 bn in just one month.

In a recently published interview to a leading daily, the director of Deutsche Asset Management, Mr. Bill Barbour, has cited all of the abovementioned points as plausible reasons for FIIs selling their shares. He has identified inflation as one of the biggest causes. The RBI is expected to raise interest rates to control inflation, which will have a negative impact on the growth. Particularly for the companies who are already reeling under the pressure of higher input prices thanks to the higher inflation. It's a vicious circle.

However, he also states that the current fall of over 12% has made Indian stocks attractive in terms of valuations. So this would again attract FIIs. He has stated that the FIIs would return thanks to their strong belief in 'India's growth story'.

So if Mr. Barbour's words are correct, we may see the influx of FII money returning to Indian shores in the coming times. But what would this lead to? Higher prices. Expensive valuations. And finally market crashes when the FIIs pull out again. Mr. Barbour is right. It is a vicious cycle and we are all stuck in the middle of it.

Want a better option? Forget what the FIIs are doing. Look for companies with strong competitive advantage, run by an honest management team and buy into the same at attractive valuations. We virtually guarantee that this will bring you much better results than worrying about what the FIIs do next.

Do you agree with our views on the FII flows? Share your views with us or you can also post comments on our Facebook page.

 Chart of the day
The flood of money has sent prices of all commodities skywards. To add to this, the natural calamities and political unrest have sent prices soaring even higher. All this has led to the prices of essential commodities especially food higher throughout the world. Today's chart of the day shows the trends in the world's food prices as measures by United Nations' FAO Food Index. The Index has touched its all time high of 231 since 1990, when the agency started monitoring the prices.

Data source: United Nations

In chaos theory, it has half-jokingly been said that a butterfly stirring the air today in Peking can transform storm systems next month in New York. The idea encompasses economics almost as much as it does natural sciences. The global economic system is much more integrated in the current times than ever before. And in such a context, a butterfly (read Mr. Bernanke) playing around with interest rates and money printing presses in the US can surely create storms in quite a many emerging economies.

But he doesn't seem to understand. Or maybe he doesn't care to understand. He refutes the arguments that Fed's QE measures have pushed capital flows into commodities and emerging markets. Of course, there are other reasons too. But the actions of a giant economic system such as the US do have far-reaching repercussions on all other economies. Not accepting this fact is dangerous we believe.

Coming back to India, the case for 'India's long term story' as we know it suffers from some serious bottlenecks. One of them is the continuous scarcity of power. India suffers a power deficit of almost 15%. The situation has remained like this for ages now. The worst part is that the country's power situation is only going to get worse. While demand continues to grow, power plants are facing short-supply of coal (which fires almost 55% of India's power plants).

The Wall Street Journal today reports that India' coal shortage is set to widen further. And the reason for this is not far to see. Domestic coal supplies, a large of which come from Coal India, are falling short of the rising demand. In the coming financial year (FY12), supply is expected to fall short by around 20%. This would mean that power companies and other consumers of coal would have to look at greater imports of the commodity. And this would mean higher prices of electricity and other things produced using the black gold.

After a dream run in the past one year, auto companies are beginning to feel the pinch of rising costs. For starters, commodity prices have been rising. As a result, most auto companies have witnessed a rise in input costs which has put considerable pressure on their margins. Further, because of the competitive nature of the industry, companies so far have chosen to absorb higher input costs for fear of losing market share. Now, there's a possibility that the Finance Minister Mr. Pranab Mukherjee could decide to increase excise duty by 2% in the Budget. If that happens, auto companies may not be able to absorb this hike. This means that companies will be compelled to pass on this additional burden to consumers. Indeed, readers would do well to recall that the government had extended a total of 4% concession on excise duty. This was due to the recession that hit global economies in late 2008 and early 2009. The benefits boosted demand to record levels. It also saw the Indian auto industry emerge among the fastest growing markets globally. Thus, if prices of automobiles start inching higher especially in an environment where interest rates are also rising, auto companies could see a slowdown in growth.

Meanwhile, the Indian markets are trading well below the dotted line. All sector indices are trading in the red with realty and FMCG stocks leading the loser pack. At the time of writing, India's benchmark index, the BSE-Sensex was trading lower by about 289 points or 1.6%. Mid-cap and Small cap stocks are trading weak as well. Many major Asian markets like China, Hong Kong, Singapore and Taiwan are closed today due to the Lunar holiday.

India, a developed nation by 2020. If one goes purely by mathematics, that's a per capita income growth of around 20% on a compounded basis for every Indian from here on. And we have not even taken the population growth into account. Looks highly improbable isn't it? But not to the man who answers to the name of A P J Abdul Kalam. The former President and also a former top defense scientist, has exhorted country's teachers and students to turn India into a developed nation by 2020. As mentioned before, the target does look a little farfetched. But Kalam's every word is worth hanging on to. He has appealed to students to continue to acquire knowledge. Besides, he has also urged them to be a good human being. What more, he has also come up with a novel way to cure corruption. He has asked students to ensure that their parents desist from corruption. "Corruption can be rooted out of society if every youth takes the responsibility of forcing his parents to desist from corruption at home," he is believed to have said. Looks like the great man has a great deal of expectations from the country's youth.

Investors in emerging markets assets are already making news. And we are not just referring to some China or India story here. Several other emerging markets as well are ensuring that the investors in assets there can make some tall order claims. Take the case of Mexican investor Carlos Slim's case for instance. His holdings in mining and communication business in Mexico have helped him beat the likes of Buffett and Bill Gates in terms of stock market returns! That too for the second straight year! We believe that there will be more such cases of emerging market investors topping American billionaires in terms of yearly returns. For the upside in emerging market assets will continue to remain higher than that in the US. Both due to corporate fundamentals and economic well being. Hence, investors need to only make sure that they buy the right assets at the correct prices.

 Today's investing mantra
"If inflation continues to soar, you're going to have to work like a dog just to live like one." - George Gobel

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24 Responses to "FIIs return to India. To do what?"

SS Varadan

Feb 11, 2011

Totally agree with the views!

Let DII, EPFOs, Retail investors come and make investments in strong Fundamental companies.


Piyush Upendra Singh

Feb 11, 2011

Mr. Barbour's mention of the Indian Equity being stuck in a vicious is only apt -- thanks to its capricious nature over the past few months. Albeit its a vicious circle, the real worry lies in the time period of its iteration; what I mean to say is: wild swings (up & down) in a matter of months will dampen investors sentiments further, & raise very serious questions on the fundamentals of our financial system.

Thank god, we still haven't lost our faith in "The Great Indian growth story" -- & very rightly so.



Feb 7, 2011

Mr Anupan Garg has missed the point completely, on trying to interpret the term 'act in unison. What I implied was stay invested, and do not fear FIIs actions and counteractions. Who said that profit is not the motive in investing in markets. If not, why do investors invest their resources?

One should not press the panic button, when FIIs are withdrawing, fearing crash in the market. Markets crash because everyone tries to quit the market when prices are falling. Is that not acting in unison, for the fear of loosing. The point that I am making is simple. Do not get panicky when the SENSEX or NIFTY is on the decline. Because panic actions cause more decline. Stay invested or invest more on dips and make use the opportunity.

Markest are unpredictable, and that is the beauty or the malice of stock markets. One needs to use his/her judgement to buy or sell at the opportune time. If one is making the expected profit by all means sell. But if one needs to sell for the fear of falling prices without making a profit, stay invested. Profits are bound to come. It is matter of time and opportunity.

The resilience of the Indian economy and the high svaings rate help to adopt this strategy....

Vinod K Huria



Feb 5, 2011

It has been more than 15 years these white elephants were allowed in indian markets. What they have invested is around 150-180 billion usd in 15 years that is around 10 b yearly at average. Domestic savings are severla folds of this amount but it will not come to equity because of this abnormal and unwarranted volatality caused by sudden inflow and outflow of FII. To my mind the collatteral damage to investor sentiment is enormous in comparison to inflows of FII. We must strenghten domestic institutions who are just reactive and never proactive. It is beyond understanding why domestic institutions are not able to lead from the fromt instead of following like beaten man. They should be leader in price discovery and not FII. Once the domestic instituion start delivering results the local investor confidence will return and we may not need any FII to provide directions to our market.


Anal Mukherjee

Feb 5, 2011

Yes! Dr. Abdul Kalam is right when he says that only youths can eradicate corruptions from the root. All youths should come forward to fulfill the dream of our great leader and see that their parents desist from corruptions. What is the use of stacking money in foreign land which is not useful for our motherland. If all the money lying out is brought here, we will not see any jobless youth and smiles in everybody's face. Let us all join and see that his dream of seeing Developed India by 2020 is a reality. If we do not come forward then the generation to come will curse us all. Come let us Join and look forward for a better, Developed India. Long Live Dr. Kalam
Jai Hind

Anal Mukherjee



Feb 4, 2011

looking the best stocks to accumulate, suggest best your knowledge and thanks



Feb 4, 2011

as rightly said companies with strong fundamentals and

strong ethics like the tata companies and some pharma companies like Lupin Cipla would outshine .

Good governance but not by the academic economists can lead the country.they should confine to academic institutions.



Feb 4, 2011

have we not learn"t from our mistakes we continue to do the same .the FIIs will keep returning it is for us to teach them a lesson. only problem is we are busy pulling the neighbours down and so we can never reach the top.with this indian attiude FII will continue to exploit us and we will fall a prey to them.


vamshi vishnu

Feb 4, 2011

I will accept with your view on Fiis. pick good fundamental company and invest in them forget about FIIS and indian polititions.



Feb 4, 2011

Since we seem to love the FII pouring in money and stocks going higher, why don't we factor FII as one of the parameters like P/E, Technicals, Fundamentals, Economy, Debt, Inflation. market sentiments and FII interest. What's wrong in that?

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