The FIIs are splurging again. Should you? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The FIIs are splurging again. Should you? 

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In this issue:
» It's been exactly a year since March 9, 2009
» Western CEOs can learn from their Indian peers
» China could let the Yuan appreciate
» Inflation is likely to temper down
» ...and more!!

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The FIIs appear to be back in business. As per reports, they purchased Indian stocks worth US$ 1.35 bn in the last one week itself. What is more, this is the highest in five months and the best in any week after a Union Budget since 2001. The fiscal consolidation plans outlined by the government wherein it plans to bring down the fiscal deficit from 6.9% of GDP in FY10 to 4.1% by FY13 seem to have boosted FII sentiment. Prolonged weakness in the developed world which is still ailing from recession has also increased the attractiveness of India and thereby its stockmarkets.

But is that reason enough for you as an investor to also invest in the stock markets? We believe not! Certainly we do not doubt the genuineness of India's growth story from a long term perspective. We believe that India has many things going for it to grow faster than the developed world in the future. This is despite various challenges that the country faces. So the enthusiasm of the FIIs is understandable taking into account that there are not many attractive opportunities elsewhere.

But this also means that valuations of many stocks across sectors have considerably run up not leaving much on the table for retail investors from a long term perspective. Therefore, what the investor needs to do is not get carried away by the buoyancy displayed by FIIs. You may have done your research and may have zeroed in on good companies with strong managements and healthy financials. But if the valuations are still expensive that that company would still not be worthwhile investing your money in.

01:19  Chart of the day
Do you remember March 9, 2009? It was from that day that the stockmarkets considerably rallied as strong expectations of a global recovery started doing the rounds. The surge since then has been nothing short of spectacular. As today's chart of the day shows, metals have gained the most in the rally and FMCG the least. Of course, the indices are still short of the highs that they reached before the plunge took place. Despite that, valuations of many companies across sectors appear stretched as prices have raced ahead of fundamentals.

*since March 9, 2009
Data Source: Prowess

This month's Harvard Business Review (HBR) includes an interesting article on how Western world's CEOs can take a leaf from the leadership skills of their Indian counterparts. "In terms of lessons for managers elsewhere, one of the most important things is that Indian leaders lead with a sense of social purpose," cites the HBR study. And the purpose ranges from improving healthcare in India, getting cell phones to people who don't have access to communication tools, and proving to the international community that Indian companies can lead in IT.

On the important aspect of employee training, the report brings about a big difference between Indian and western firms. It states, "Indian firms invest an enormous amount in their employees' training and development." As against this, "...US firms have largely abandoned investing in employees, seeing it as a waste if they leave the business."

Looks like China may finally give in to the pressure. The pressure of keeping the Yuan under a tight leash that is. As per reports, there are enough hints coming out of the dragon nation that it would let its currency rise by a small amount over the forthcoming months. However, the Chinese authorities will have to tread carefully here. Too rapid an appreciation could spark social unrest as it would make its huge export driven machinery that much less competitive and result in job losses. On the other hand, a gradual appreciation could delay the nation's transformation into a consumption driven economy, a very important prerequisite for creating a stable economy.

By all means, the appreciation is likely to be gradual like it had done in 2005 where it let the Yuan appreciate by around 20% against the dollar over a period of time. While the biggest protest against an undervalued Yuan has come from US, we are not sure the move could help the US economy. Due to the fundamentally different nature of the products that both China and the US export, any loss to China on the exports front cannot be a big gain for the US. What the appreciation will nevertheless do is help reduce the lopsided nature of the global imbalance currently and enable the creation of a more shock resistant global economy.

If the rising prices of commodities and food products have left you worrying, here is a piece of good news. As per RBI governor Dr Subbarao, the inflationary trend is soon expected to moderate. The governor justifies his claim on the rationale that supply constraints are seen easing out in the near future. Also, the government's attempt to rein in fiscal deficit will play its part in moderating price rises. Having said that, Subbarao also confirmed to a business daily that the RBI will not shy away from using its monetary tools if necessary to ensure that inflation does not go out of hand. Thus, while the upward direction of interest rates is undoubted, it is only a question of when and how much will it rise.

Many of the US Fed's liquidity programs that were earlier initiated with a view to prop up a depressed economy are set to expire at the end of this month. The co-chief investment officer and founder of Pimco and manager of the world's largest bond fund, Bill Gross recently opined that the Fed may have to continue some of these programs. This is because the US economy continues to remain fragile, and may not be able to hold up without them. Infact, he has gone as far as to say that he sees economic struggles continuing over a 3 to 5 year period, and even as long as 10 years, depending on circumstances.

When we think of investing in businesses, we primarily think of buying the existing stocks of publicly listed companies. But what if the business is not publicly listed? Such businesses can and do access equity capital from a class of investors called Private Equity (PE) firms. As per a leading report by a leading consulting firm, India ranks third among the top PE investment destinations around the world.

The top two slots are taken by the US and China respectively. In our view this favourable outlook on India by PE investors is driven partly by its growth rate. The other reason is that a lot of businesses in India are family owned are increasingly looking at outside equity capital as they seek to expand. So, it is not only the publicly listed companies that are attracting the attention of global investors.

BSE-Sensex was trading lower by about 17 points (0.1%). While the Asian indices were trading mixed, the European indices had opened in the red. Gains were seen in IT and FMCG stocks. However, metals stocks were at the receiving end.

04:58  Today's investing mantra
"The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase." - Benjamin Graham
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5 Responses to "The FIIs are splurging again. Should you?"


Jun 14, 2010

It looks indian share market is more inclined towards FII and does it do any good.


Anupam Garg

Mar 9, 2010

I simply loved reading your articles because of their UNBIASED opinions. Somehow, I am not convinced with today's article.....the reasons are listed as follows:

the first article biases against long term investments, something which you preached till yesterday

The chart looks quite true....FMCG being a defensive sector is bound to have lowest but secure returns

Quite obviously, in the phase of recession, US should not be extravagant and spend carelessly, the sole purpose behind T&D is grooming of an employee's mind in the right direction

I wonder if China is gonna stop its policy of pegged exchange rate. However, I admit I am not aware of the HINTS. If possible, kindly mail me the same.

I really appreciate today's mantra


Nitin Patel

Mar 9, 2010

The impact of appreciation of chinese currency is not in export markets of USA. It is the impact of higher prices of chinese imports in in the domestic market in USA.


sushant katiyar

Mar 9, 2010

The FIIs appear to be back in business. As per reports, they purchased Indian stocks worth US$ 1.35 bn in the last one week itself. What is more, this is the highest in five months and the best in any week after a Union Budget since 2001. The fiscal consolidation plans outlined by the government wherein it plans to bring down the fiscal deficit from 6.9% of GDP in FY10 to 4.1% by FY13 seem to have boosted FII sentiment. Prolonged weakness in the developed world which is still ailing from recession has also increased the attractiveness of India and thereby its stockmarkets.



Mar 9, 2010

It is quite evident that FIIs are splurging again. They have their own valid reasons for it. But the retail investor here should always bear it in mind that it is very unwise to 'chase and buy' when the market is rising. Timing is of essence both when buying and selling shares.
The good news from the RBI Governor that inflationary trend is expected to moderate and that the RBI will not shy away from using its monetary tools if and when necessary should bring cheer to the common man.

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