Why you should follow neither FIIs nor DIIs? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why you should follow neither FIIs nor DIIs? 

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In this issue:
» Dec IIP numbers could play spoilsport
» Severe labour shortage by next decade
» The reason the financial crisis got worse
» Potential of Indian modern retail
» ...and more!

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If there is one thing certain about the stock markets, it is the uncertainty. The stock ticker always seems to tread a shaky and capricious path. With no clarity in sight, small investors often resort to taking the cue from the big investors. Are the foreign institutional investors (FIIs) buying or selling? Which stocks and sectors are the FIIs betting on? Where are the domestic mutual funds putting their money? What are the fund managers saying about the market and the economy?

Investors are often under the impression that the so-called big guys really know what's going on in the economy and the stock markets. With so many experts crunching loads of data, this presumption may not be too farfetched. But the thing is that the economy is way too complex and intricate for any expert to fully fathom it. As such, following FIIs and domestic institutional investors (DIIs) blindly could be misleading.

An article in Moneylife points out at some interesting data. Through most of 2012, FIIs were pumping money into the Indian stock markets. For 10 of the 12 months, they were net buyers. On the contrary, DIIs were net sellers for 9 of the 12 months.

But this is not where their differences end. Both FIIs and DIIs have differing views on different sectors, sometimes even stark opposite. For instance, FIIs have been bullish on bank sector and financial services sector. However, DIIs are bearish on this sector. If you compare the top 10 FII underweight list and the top 10 overweight list of domestic mutual funds, you will see that FIIs are buying some of the same stocks that the DIIs are selling, and vice versa.

If two so-called experts share opposite views, whom should you listen to? Our answer is no one. Why so? There are several factors and institutional compulsions that determine FII and DII investing behaviour. For example, redemption pressure and scarcity of new fund inflows could force mutual funds to sell off their stocks. On the other hand, FIIs have their own set of problems. Any adverse financial situation in their home country could force them to flee away from the Indian markets. Plus, they have to deal with the currency risk as well.

In addition, both FIIs and DIIs are often prone to following the 'institutional imperative'. For the uninitiated, Warren Buffett describes the 'institutional imperative' as that urge for managers to mimic what their peers are doing even if it may seem irrational. The performance of fund managers is closely monitored over the short term. This may make them short-sighted and unwilling to take contrarian bets.

We believe the small investors are not constrained by the above mentioned limitations and have significant advantages over these big investors. As such, it would be best you do not pay much heed to what the FIIs and DIIs are doing. Do your own research and stick to the principles of value investing. This has worked brilliantly for some of the world's most successful investors. There is hardly any doubt why it will not work for you.

We are glad to inform you that Mr Bill Bonner, founder of Agora Inc and author of renowned financial column 'The Daily Reckoning' is visiting us in India very soon. Mr Bonner has been a long time 'gold bug' and is known for his unconventional and hard-hitting views on the global economy.

If you would like to hear Mr Bonner's views on any of your queries, please send in your questions or post them on our Facebook page / Google+ page

01:59  Chart of the day
In less than a decade, modern retail has witnessed rapid growth in India. Between 2007 and 2011, the Indian retail industry has grown at an average rate of about 8% per annum. In fact, organised retail has grown three times faster than the unorganised sector. Today's chart of the day shows share of organised retail in total retail in the US and some emerging Asian economies. While organised retail accounts for 85% of the entire retail industry in the US, the share in India stands at a mere 7%. However, this is set to grow at a robust pace, and by 2016, the share of organised retail is expected to double to 14%. Some of key drivers of this growth will be increasing disposable income, improved back-end infrastructure and FDI investments in retail.

Data source: DNA Money
*As a percentage of total retail, 2011

Theoretically the stock markets are considered to be the barometer of an economy. Considered a lead indicator, they are supposed to reflect the direction the economy is going to take in the coming times. Therefore when our very own BSE-Sensex breached the 20,000 mark in January 2013, everyone thought the economy is taking a turn for the better. But the recently released economic data seems to point to the contrary. Dismal numbers for the IIP (Index for Industrial Production) suggest that the economy is still not out of the woods. So why have the stock markets been heading upwards? Simple, it is because of the flood of cheap money that has invaded our markets. With developed economies printing money like there is no tomorrow, a large part of it has found its way into India. This has led prices of asset classes, particularly stocks, to run up in recent times. As a result, stock markets do not seem to be reflecting the true state of the economy. However, it must be remembered that this can only continue for a short period of time. In the long term, the relationship between earnings and stock prices has to hold. So either the economy would take a turn for the better. Or the stock markets would come crashing down.

The construction and real estate industry is plagued with various issues. Execution hurdles and cost inflation are the prominent ones. While it seems there is no end to these issues, labour shortage is expected to cause further headache going forward. As per a survey, the construction industry is likely to face a labor shortage of 65% over the next decade. This will be due to a shift in workforce from traditional brick & mortar industry to services sector. Over time, more and more people are likely to shift from low paying construction jobs to white collar jobs in banking, telecom and IT industry.

This has two implications. One would be from the construction industry perspective and second from the education standpoint. Acute shortage of workforce will drive the labour cost upwards in construction sector. It will also force the industry towards mechanisation. Secondly, labour flight towards services sector suggests that the level of education in India is bound to increase in the next decade. That's because services industry requires relatively skilled labour as compared to construction industry.

The US Fed would have the world believe that intervention helped contain the 2008 financial crisis to a large extent. But Jeffrey Lacker, president of the Richmond Federal Reserve Bank, believes otherwise. Lacker is of the view that as early as August 2007, US Fed's attempts to rescue the financial sector only led to a full blown financial crisis later. During that time, Bear Stearns and Lehman Brothers were displaying signs of trouble. Had the US Fed not intervened, both these investment banks would have no choice but to implement more drastic measures. This is to get their finances in order. But the US Fed chose not to adopt a measured response. Instead it decided to step in. As a result, the world was faced with a deepened crisis and tremendous instability in the global markets in late 2008 when Lehman Brothers collapsed. The fact that Lacker had reservations about the US Fed's decision in 2007 was apparent in the transcripts of the Fed meetings in that year. Since the crisis, the US Fed has again resorted to massive quantitative easing programs. None of which has led to any sort of meaningful recovery.

In the meanwhile, the Indian equity markets continued to trade above the dotted line. At the time of writing, the BSE-Sensex was up by 136 points (0.7%). Among the stocks leading the gains were Tata Motors and Bharti Airtel. Barring Japan, all major Asian stock markets were trading in the green led by stock markets in South Korea and Singapore.

04:40  Today's investing mantra
"So it's a terrible mistake to look at what's going on in the economy today and then decide whether to buy or sell stocks based on it. You should decide whether to buy or sell stocks based on how much you're getting for your money, long-term value you're getting for your money at any given time. And next week doesn't make any difference because next week, next week is going to be a week further away. And the important thing is to have the right long-term outlook, evaluate the businesses you are buying. And then a terrible market or a terrible economy is your friend." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Why you should follow neither FIIs nor DIIs?". Click here!

    3 Responses to "Why you should follow neither FIIs nor DIIs?"


    Jun 10, 2013

    This is a very good article. I also think that how beautifully the law of probability works. Investing or trading mantra is when you buy it must be in sale and when you sell it must be on top.



    Feb 15, 2013

    ZI fully agree with these views.One should have his own data to invest in stocks.Situation is changing often and no pattern can be predicted for a longtime.



    Feb 13, 2013

    Very good news. I am a fan of Mr Bill Bonner's articles. His views are always a clean single cut and two pieces (In Tamil it is Vettu onnu, Thundu Rendu) kind of a thing. Welcome Mr Bill to India. I am very sure there are a lot of fans waiting to see and question you.

    Like (1)
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