Do you buy stocks based on FII ownership? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Do you buy stocks based on FII ownership? 

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In this issue:
» China's GDP is inflated by 25%!
» Marc Faber: Stocks could correct by 30%
» What India Inc wants from tomorrow's budget?
» Why there is an onion crisis despite best ever harvest...
» ...and more!

The Indian stock markets continue to be dominated by Foreign Institutional Investors (FIIs). Of the top 75 listed companies in India, FIIs own about 25% stake in each of them. Amidst buoyant market sentiments, their stake in Indian equities increased and hit record high in the last quarter. Even domestic institutional investors (DIIs) followed FIIs and increased their stake in Indian equities.

However, the only category of investors that saw their stake decline in the recent past is promoters. Needless to say, the retail category witnessed this rally from the stands being a silent spectator.

So, what does this change of hands indicate?

For one, it indicates the optimism of FIIs and DIIs towards Indian stocks. Modi factor coupled with expectations that the new finance minister will bid farewell to populism has cheered investors alike. And the promoter community has taken advantage of this euphoria to offload stakes in their companies.

Of course, buying by FIIs is likely to entice a herd mentality amongst naive investors. The reason is simple. One would like to emulate more informed or sophisticated investor pool while building or replicating portfolios. However, this could be fatal. For one, money is not made by replicating. Moreover, since the FIIs are largely short term fair-weather investors, investing based on the FII trends could expose investors to undue risks.

Secondly, stocks with high FII ownership could be very volatile. For instance, stocks in banking and financial sector are amongst the most favoured by FIIs currently. FII holdings in these stocks itself has hit about 8 year high. However, if the expectations surrounding the sector do not materialize, and budget will be one event which these investors will generally look forward to in order to assess that, the stocks in the sector could correct. And result in losses for investors.

This is the time when investors who felt left out in the initial leg should ideally look for bargains. Finding buying opportunities during weakness would mean they will be better off than their replicating counterparts.

However, one should also remember that money is not made by simply being a contrarian. Just because you buy when everyone is selling does not assure guaranteed returns. One should assess the fundamental strength and valuation of companies which he/she is trying to bottom fish during correction. This is a better approach to investing rather than basing your decisions on the change in FII ownership.

Do you analyze FII ownership changes before buying stocks for your portfolio? Let us know in the Equitymaster Club or share your comments below.

By the way, this Thursday (10th July) we will send out a special edition of the 5 Minute Wrapup covering the key takeaways from the Union Budget. Along with that a Budget Impact report, analyzing sector wise impact, will also be available for download within hours of the Budget announcement.

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01:50  Chart of the day
Fathom this! Over 12,500 trains carry 2.3 crore passengers everyday in India. That's equal to the entire population of Australia. Yet the Indian Railways are incurring losses. But that's truly not surprising. The passenger segment has been bleeding since years together. A leading financial daily unleashes the passenger data. During 2013-14, the Indian Railways reported a staggering loss of Rs 290 bn. That's 8% loss year-on-year. And a staggering 45% if we compare this number as against Rs 199 bn loss reported in 2011-12. In 2013-14, the Railway bore a loss of 23 paise per km per passenger. Well, the government's maiden Rail budget spells promises to fulfil aspirations of millions of travellers. But the above patchy track records call for skepticism. We hope the government keeps an eye on these details. And hopefully the aspirations turn into reality some day!

Can the new rail budget reduce mounting losses?

In its most basic form, the GDP of an economy is of course the total value of the goods and services that it produces in a year. However, if one has to look at the quality of GDP growth then one has to dig a bit deeper we believe. A well-known market expert has done this for the Chinese GDP. And he's come away with the conclusion that the investment part of the Chinese GDP looks a bit shaky. And therefore when the chickens of this wasteful spending will come home to roost, the dragon nation could well see a 25% decline in its GDP! The thesis is simple. The investment portion of a GDP should go into building productive assets. Assets that can generate even more GDP in the future. However, a substantial portion of this investment in China is going towards real estate for which there is hardly any demand currently. And therefore when this bubble bursts, there will be a lot of pain in the form of losses and unemployment. Well, we would like to be in total agreement with the gentleman. It does look like that the Chinese economy is sitting on a real estate bubble and is in fact adding more fuel to it. Therefore, when the day of reckoning comes, the consequences are going to be catastrophic we believe.

It is for good reason that Marc Faber's doomsday predictions are feared on the Wall Street. The author of the Gloom, Boom and Doom report has on several occasions earlier predicted frothiness in global stock markets. This time around his predictions are far more daring. In his latest report, Faber has reasoned that the colossal bubble across asset classes will eventually burst. And when asset prices start correcting, investors may even witness a prolonged bear market. Faber is particularly pessimistic about the American equity markets. According to him, Obama's poor administration may lead to political turmoil in the US. And that may lead to stocks correcting by as much as 30%! Faber has also contended that the economic recovery in the US is not real. Moreover, the high valuation of US stocks is backed by stock buybacks and not growth in earnings. Thus with interest rates moving higher he anticipates the party in stock markets to end. We cannot agree more with Faber's assessment of the risk created by US Fed's loose monetary policies. What is important to remember is that if the US catches cold, most other economies will be left sneezing. Hence even economies like India that are relatively more stable will feel the tremors.

High prices of onions have brought tear to common man's eyes. Ironically, this is despite the record production in the country. Blame the poor storage systems and hoarding practices in India. And this crisis is likely to stretch for sometime. This is because there are not enough quality seeds left. On the top of that, the seed prices have seen more than three fold increase. This is likely to reduce the cultivation of onions. Further, with monsoons giving tough times, the crop yield is likely to be low. In fact, Government is planning to import onions to meet the shortage.

But that can hardly be the solution. The new Government will need to ensure better storage systems for farm production and crack down on hoarding practices to ensure enough food supply. Further, the control of middlemen needs to be cut. Rising food prices is the key culprit behind overall high inflation levels in the economy. Also one of the factors that voted the UPA out of power. It will be interesting to watch how Modi Government tackles this issue and if it can live up to the common man's expectations.

After the general elections, the Budget has been the next most anticipated event. Not surprisingly Corporate India has a list of expectations from the FM. The most obvious is to bolster the beleaguered power, infrastructure and energy sector. Indeed, a lot of key projects in these sectors have been stalled. Not to mention the myriad layers of red tape which have hampered investments in these sectors. The other items on the wishlist are related to tax. One of these is to lower corporate tax rate on the rationale that since India is still a growing economy, a lower tax rate will leave more cash in the hands of companies to plough back into the business. The other is to do away with applying tax laws retrospectively. This has been a very sore point for India Inc and was one of the reasons that led to loss of confidence of investors into the Indian economy. Speedy settlement of tax disputes and deferring general anti avoidance rule (GAAR) are some of the other wants from corporates. It is quite clear that the Budget will not be able to cater to the wishlist of each and every sector. But if it charts a clear map in terms of bolstering infrastructure, then that itself will go a long way in setting India's growth on the right path.

In the meanwhile, the Indian stock markets further slipped in the red in the post noon trading session. At the time of writing, the BSE-Sensex was trading lower by 116 points or 0.5%. Barring oil & gas and FMCG, all the sectoral indices were trading in the red led by auto and power stocks. With the exception of Indonesia, all the Asian indices were trading in the red. Markets in Hong Kong and China were the biggest losers. Even European markets have opened the day on a negative note.

04:50  Today's investing mantra
"You are neither right nor wrong because the crowd disagrees with you" - Warren Buffett
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1 Responses to "Do you buy stocks based on FII ownership?"

preet sagar

Jul 10, 2014

i wish to analyse before buying but do not know which website i should search to know what qty in a particular company have bought or sold. can anybody advise me particular sites for this.

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