How value investors can take advantage of FII flows? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

How value investors can take advantage of FII flows? 

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In this issue:
» Mark Mobius is bullish about 2013
» Trillion dollar coin idea rejected
» Copper and equities treading different paths
» RBI's dollar sales expose rupee's weakness
» ...and more!

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What happens when an economy slows down and inflation remains high? Corporate earnings tend to be adversely affected. This in turn should weigh down on stock prices, right? But nothing could be further from the truth, especially as far as Indian equity markets are concerned. While the economy slowed and corporate earnings faltered, the benchmark BSE-Sensex outperformed most global indices in 2012 with gains of over 25%. Mind you, this was a year when domestic investors were fleeing away from equities.

What led to the significant rally in the Indian stocks then? The answer is foreign institutional investors (FIIs) inflows. While domestic investors were dumping stocks, FIIs were quietly propping up their stakes. Between 2QFY11 and 3QFY13, FII shareholding in 175 companies of the BSE-500 index increased from 12.9% to 14%. During the same period, while public shareholding declined from 11.3% to 10.8%, the holdings of domestic institutions dropped from 10.1% to 9.5%. Effectively, one could conclude that FIIs are very crucial drivers of Indian stock markets.

The market sentiment in the New Year is less pessimistic. The worst seems to be behind us. Many markets experts have already given the thumbs-up to the markets. But they all share a big fear. What if FIIs turn net sellers in 2013? At a time when sentiments are improving globally, FIIs could dump India for more lucrative markets.

Should we really worry about FIIs? If you are a short term trader, maybe you should. But any substantial decline in the markets could bring up attractive buying opportunities for long term value investors. Such liquidity risk is actually the best friend of value investors. It is during such times that markets could act irrationally and throw up bargain opportunities for value hunters.

Do you think one can make money in stocks by tracking FII flows? Share your comments with us or post your views on Facebook page / Google+ page

01:02  Chart of the day
Time and again, India's demographic dividend has been touted as one of the key drivers for India's growth in the future. But this does not have much meaning if its people are not equipped with the requisite skills required to get employed. Further, there seems to be a considerable gap between the syllabus taught at current educational institutes and what the industry requires. Lack of focus on innovation and research has been cited as the main culprit for this. Indeed, as today's chart of the day shows, India has only 150 research professionals per million people, meaning that it is way behind many of its peers. And unless steps are not taken to correct this, it could prove to be its undoing in the longer term. Some leading companies have started to realise the importance of research and are taking proactive steps to form tie-ups with institutes to set up research hubs in the country. On a much macro basis, the government also needs to divert much of its unproductive expenditure towards more productive areas which include education, healthcare, among others.

Data source: The Economic Times magazine

"2013 will be a fantastic year". This prediction from Mark Mobius of Templeton Asset Management is certain to get investor sentiments soaring. However, his interview on Bloomberg clarifies why he believes so. Also which emerging markets could have it better than the others. Mark Mobius' prediction relies on the fact that excess liquidity will keep sloshing around in 2013. Especially since Japan has joined the club of money printing countries with near-zero interest rates. And the liquidity will try to find home in emerging market assets with higher growth opportunities. Mobius does not mince words about the fact that China remains his favourite emerging market. Also it is the consumption story than the commodity story that he is more bullish about. But other than China, he believes that undervalued emerging markets will find more takers. This includes the likes of South Africa, Vietnam, Pakistan, Bangladesh and few more. So while emerging markets will continue to lure global investors, they will not lose sight of valuations. Thus it will be grossly wrong for Indian investors to assume that FII money will chase Indian stocks irrespective of valuations.

Abraham Lincoln may be one of the greatest US Presidents ever. But there was this one blemish that in hindsight even he wouldn't have been too proud of. Under his watch, the US Government printed US$ 450 m, money that come out of nothing but thin air. And he wasn't the only President to have tried this. We are all aware how in 1971 President Nixon abolished the gold standard and consequently, gave the US Fed full control over money supply. The Obama administration was very close to entering this rather infamous club. Courtesy the famous trillion dollar coin idea.

With the Republicans hell bent on giving Obama a tough time in getting the debt ceiling raised, the idea of having a trillion dollar gold coin issued was doing the rounds. If approved, it would have led to another potentially inflationary trillion dollar stimulus to the economy. However, better sense seems to have prevailed at both the US Fed and the Treasury. As per reports, both these institutions have rejected the idea. However, this will be only a temporary reprieve we believe. It is only a matter of time before the debt ceiling is raised. And once it happens, cheap money will eventually find its way into the economy.

There is a strong link between the prices of copper and stocks. Their prices broadly move in tandem. This is because the movement in the price of copper, which is widely used in manufacturing, tends to give signals for the amount of industrial activity taking place. When the metal's price moves up, it would be fair to assume that the usage of the metal is high. Therefore, signaling higher manufacturing. And the same would hold true in case of vice-versa. Since the market lows of March 2009, the equity markets have been led or supported by the copper market. However, as per an article in the Firstpost, there is something different this time around. Copper prices have not moved in tandem with the recent rise in stock markets. While various reasons are being floated for the same - such as the market rally surge being driven by the service sector stocks - we cannot ignore the basic assessment. That is of improved market sentiments. There have been reports of FY13 seeing no real growth in earnings. And given the market surge, there has only been an expansion in multiples.

Export growth in India has been lackluster. Well, this is no surprise given the economic situation globally. In fact, exports have fallen for 8 months straight till November this fiscal year. However, the Indian economy is still growing and needs overseas imports. The gap between imports and exports is widening, and the plug needs to be filled in. While portfolio inflows somewhat help, it is not sufficient enough to meet the demand. Now, due to the worsening trade balance, the Indian Rupee has been badly hit. In order to defend the currency, the Reserve Bank of India (RBI) has boldly stepped in. In order to keep currency movements smooth, the central bank's dollar sales in November jumped 10-fold. The RBI sold a net US$ 921 m in November 2012, up from US$ 95 m in October. But, is this sustainable? The RBI cannot always be the knight in shining armour for India. The current account still remains well above comfort levels, at 5.4% of GDP in the September quarter. India is also weak as compared to the BRICs in terms of external debt indicators. With these problems seeing no sign of easing, we expect the Indian rupee to continue to remain weak for some more time.

In the meanwhile, the Indian equity markets displayed positive investor sentiments in today's trade. At the time of writing, BSE Sensex was up by 164 points (0.8%). Among sectoral indices, auto and healthcare stocks were the only exceptions to the long list of gainers. Asian stock markets traded in the green except Singapore.

04:30  Today's Investing Mantra
"If you take the percentage of bonds and stocks held by people who could change their minds tomorrow based on what the Fed does, etc., it's gone up a lot. I call it an electronic herd, who change what they do every day or minute. The turnover of stocks has gone from 40% to over 100%, and the turnover of bonds has gone up dramatically as well. There's nothing evil about it, but it's a different game and there are consequences. If you're trying to beat the other fellow on a day-to-day basis and you're watching the news or the other fellow, and you think he's going to push the sell button, you'll try to push it quicker." - Warren Buffett

  • Warren Buffett - The Value Investor
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    3 Responses to "How value investors can take advantage of FII flows?"


    Jan 14, 2013

    In 1871to1985, in cricket, the victory of Indian team was dependent on how Sunil Gavaskar play!!Like that ,Indian stock market indices depends on what FII do!!!!!!!!!The indian stock market is prey of FII & FII & FII ONLY!

    Like (2)


    Jan 14, 2013

    FII money flow tracking is a good indicator for short term traders, not for real investors, they should follow fundamentals of stocks for value buying.

    Like (1)

    ramesh jain

    Jan 14, 2013

    Ii think this one sure way of making money in Indian market is to track FII inflows or outflows.One should start buying in the stocks they buy and when they buy and sell when they start selling.This is in theory but how to use this practically I have not been able to work out.Will someone who agrees with this and practically using this theory kindly give guidance how go about this.I shall be thankful

    Like (1)
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