Should you blindly follow FII cues?

Feb 21, 2011

In this issue:
» Maruti is India's No. 1 MNC
» Govt. to miss its disinvestment target
» Rising interest rates to impact banks' profitability
» Silver prices leading mints to ration coins?
» ...and more!

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Which stocks should I invest in? Is this stock worth buying? When should I sell the stock that I have in my portfolio? These are just some of the common questions that fill an investor's mind when investing in the stock markets.

People turn to everyone to seek answers for these questions. But what is the right answer? A leading daily tried to come up with an answer for this. It has advised small investors to look at those stocks that are witnessing buying interest from the FIIs. It has run study that establishes that in the period from March to December 2010, the 57% of the stocks that were favoured by the FIIs outperformed the Sensex.

Sounds like a very interesting theory indeed. Just buy the stocks that the FIIs are buying. But what happens when the FIIs are selling? In this case, as per the same daily, 76% of the stocks that were being sold by the FIIs underperformed the Sensex.

So if these results are accurate and you decide to follow the FIIs, then true that you would end up with some stocks that do well. But when the FIIs sell, the same stock plummets to new lows. And keep this point in mind, you find out the FIIs are selling only after they have already sold. There is no pre-warning system and you end up getting stuck with the wrong stock.

This leads us back to the same question. Which stock should one buy? In our opinion, there is no substitute for fundamentals. Companies with sound fundamentals And solid management teams are the ones who maximize the returns for their shareholders over the long term. Yes, there may be short term glitches but over the long term, the tears are converted to smiles for the investors.

Do you invest in stocks that are the FII favourites? Share your comments with us or post your views on our facebook page.

 Chart of the day
We have talked in depth about inflation rates. The rate of inflation has been spiraling northwards. The RBI has been raising interest rates to counter the inflation. Today's chart of the day shows the trend in inflation and the interest rates in the country. Interest rates in 2008, were high, but were subsequently lowered by RBI to boost investments in the country. However, when inflation rates started to spiral out of control since 2010, RBI has been raising interest rates. This has brought down inflation in recent times. However, it still remains higher than the yearend target of 7% that the central bank has set for itself.

Data source: RBI

Credit growth in India has been rapid, clocking in at around 20-22%. Funding is definitely required in an economy growing at a quick pace of around 8.6%. However despite this, profitability for banks may take a hit, due to rising interest rates. Tight liquidity is also not helping the situation much. Bank net interest margins (NIMs) are expected to shrink in 2011, according to Fitch.

Banks have the ability to pass on higher interest costs to customers by increasing lending rates. But competition is forcing them to absorb some of the cost themselves. This in turn hurts their margins. While we believe that the long term prospects of the banking sector is strong in a country like India, short term margin pressures may exist.

Just some months back, IPOs of PSU stocks were selling like hot cakes. The government managed divestments worth Rs 220 bn in the current fiscal year. With follow on issues from ONGC and SAIL that were supposed to hit before end of March 2011, the government had seemed set to achieve the Rs 400 bn target for the fiscal. But this target seems hard to achieve now.

The ONGC issue is supposed to hit around mid March 2011.But as per the latest news, the issue of SAIL will hit the market only in the next fiscal. So, the government's Rs 400 bn target for the fiscal will be derailed by about Rs 80 bn, which is the amount that the SAIL FPO would have probably garnered. Now the reasons for this delay are very obvious. The stock markets are going through a rough patch. And after a big ticket issue like ONGC, there may be little resources left with investors for SAIL. On similar lines, several other divestment plans have also been delayed. The rise in oil prices have thrown off FPO plans of the oil marketing major IOC indefinitely. The company is currently losing a record Rs 2.37 bn per day on selling auto and cooking fuel below cost. The issue of Hindustan Copper which was earlier scheduled for December 2010 has also been deferred due to the volatility in the markets. With divestment plans getting delayed, the sailing won't be smooth as far as our fiscal deficit is concerned.

The list of the biggest MNCs in India is out. The top 10 list that ranks MNCs by sales has seen somewhat of a churn in recent times. It is no longer the FMCG firms that rule the roost here. Infact, quite a few of them did not even find a mention in the top 10. So, which MNC has the highest turnover in India? Well, it is the passenger car maker Maruti Suzuki. We know a lot of people will not count Maruti as an MNC. But ever since the Japanese major Suzuki has started owning a 54% stake in it, the company has effectively become an MNC. FMCG behemoth HUL is perhaps the only name from the past that is still going strong. The company was perched nicely at number six. Other names on the list included firms associated with the telecom and IT industry and also consumer electronics giants like LG and Samsung. The sad part though is that there are only about 3 companies on the list that have also made Indian shareholders rich. All the other companies are not listed in India and hence, their enormous growth in recent years have not transformed into growth in wealth of local investors.

This precious metal has had so much demand in recent times that mints are rationing its sales. No, it's not gold we are talking about but silver. For instance, the Royal Canadian Mint has stated that it has sold everything that it has produced in silver and there is still demand for at least twice that volume. Recession in the West has still not abated. And governments there are responding to the problem at hand by printing money at the drop of a hat. This has put a serious question mark over the fate of their respective currencies.

And so investors the world over are looking to hedge this risk by investing in precious metals such as gold and silver. But the demand for silver has probably been more than its counterpart of late simply because it has more industrial uses than gold. And with the global economy improving a tad bit, demand for silver has also seen a rise. Indeed, it does look like silver will outperform gold for the time being at least.

The two words starting with "I" have recently been a regular part of any form of communication by the Indian policy makers to the public in general. One is inflation and second is infrastructure. While government has been moderately successful in taming the first "I" the second one has proved to be a nightmare of sorts. Despite conceiving new strategies and plans to boost investment in infrastructure the government has achieved little success to say the least. But that has not restricted it from coming out with a new suggestions/measures every now and then. Here is the new one for you. The FM today voiced his opinion stating that global surpluses should be used for financing infrastructure in developing countries through multilateral development banks (MDB's). A high level panel being set up under the G20 development agenda should focus on this issue. We believe this move could bring in the much needed capital to fund infrastructure investments in the developing nations. However, considering the past where a slew of measures were announced with little focus on implementation our eyes are glued as to when the proposed measure would come into effect.

In the meanwhile, Indian markets continued to trade below the dotted line despite a few attempts to stay in the green in the seesaw trade. At the time of writing, India's benchmark index, the BSE Sensex was trading lower by about 75 points. Stocks from automobiles, realty and banking led the pack of losers, while Oil and gas was trading firm. As for the rest of Asia, the sentiments seemed mixed as Japan was trading higher, while Hong Kong was trading weak. The Europeans markets have opened with a mixed bag.

 Todays investing mantra
"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid." Warren Buffett

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7 Responses to "Should you blindly follow FII cues?"

Sonny Jacob

Feb 21, 2011

A sensible investor should not follow FIIs attitude. Generally speaking, they are not strategic in investments. They learn India long term growth story and ask their money managers to divert huge funds to India. Within a "short" time, if they hear China or Brazil has a better story to offer, they divert the entire fund to that country. They doom the markets more than blooming it.


C S Radhakrishnan

Feb 21, 2011

A better cue than FII investments is the PE investment trend,since they would rarely rush in for a kill and exit like a tornado.Most of these investors are those who grew their wealth systematically ,over long spells. They invest only after due diligence checks If one can access the data on PE investments, that would be a more accurate hint of the shape of things with the invested companies.



Feb 21, 2011

The financial clout of FIIs decides which way the market moves and one can not argue with them. Bulk deals are shown on BSE site and many other web sites. So one can track those to sell when the FIIs are ditching a stock. As you had pointed out it is the size of floating stock that decides if the investor can safely move in or get his stock out. As an individual investor one can hope that Equitymaster's team keeps track of such movements and warns us in time!



Feb 21, 2011

There is no doubt that FII have a very strong hold on the movement of the market and eventually the stock is also true that fundamentals will always weigh on their mind at the time of investment... again even a very fundamentally strong company which we purchase at a very high price will take a long time to show any significant profit to us. Hence weather you follow FII or not one thing is very important is that -- what price you pay for the stock ... if u feel the stock has potential and the price is right it makes no difference weather the FII buy or sell, eventually the stock has to perform.



Feb 21, 2011





Feb 21, 2011

I am not supporting this theory. But what makes you think that FIIs don't buy stocks which are fundamentally sound ?


vedpathak 9930258526

Feb 21, 2011

Dear Sir
Your view is perfectly correct. There is no alternative to take decisions on the basis of fundamentals. The views expressed in the leading daily are only confusing. Instead the daily should guide on your line.

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