What do FIIs know that small investors don't? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What do FIIs know that small investors don't? 

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In this issue:
» Investment advice via SMS - Potential for more scams
» Coming soon - A regulator for roads
» PM's economic council wants more banking reforms
» Abenomics one year on
» ....and more

The stock markets have touched record highs against all odds namely, a slowing economy, poor corporate earnings, high inflation and high interest rates. Many people have different theories about the record high rally. According to Goldman Sachs, the emergence of BJP's prime ministerial candidate Narendra Modi as an agent of change is one of the reasons for the recent run-up seen in the equity markets. They said, equity investors tend to view the BJP as business-friendly.

Others see the delayed tapering by the US fed as the major reason behind the rally. Most market participants expect the U.S. central bank to delay tapering its stimulus until at least March next year. This led to strong FII inflows into the Indian equity markets. So was the large part of the recent market rally driven by Modi, or was it global liquidity that was the sole reason?

Let us see how shareholdings have changed to perhaps get a better idea of what's driving the rally. In this bull market, promoters have sold stakes while foreign institutional investors have tightened their grip. The SEBI ruling on minimum public shareholding and mounting debt troubles for many companies made promoters sell their stakes. But it was the FII's that bought these stakes. In the BSE 500, FII stake jumped to 20% by September 2013, up from 15% in 2008. In the Sensex and Nifty, FII holding is even higher at 22%. While at the same time, retail investors holding stood unchanged at 8% over the past 5 years. Therefore it is clear that although retail investors have quite opened their purse strings, it is the FIIs who've dominated share purchases.

This trend was also reflective in an interesting exercise conducted by Economic Times. They conducted an experiment to show the dominance of FII's on Indian equity markets. They removed stocks from BSE Sensex having high FII weightage and assumed the benchmark to comprise of top 15 stocks with the lowest foreign fund holding. And keeping the Sensex 2008 base, the index stood at 16000. And when they removed stocks having low FII weightage, the index stood at 41000. This clearly shows the kind of influence FIIs have had over the recent surge in the stock markets.

What is surprising though is that retail investors have shied away from the market. In-fact, investors pulled out record money from equity mutual funds in October. Outflows from equity mutual funds touched 13-month high last month when the markets were breaching their old peaks. What more, inflows into equity mutual funds in October stood at the second lowest level in last 53 months.

All this makes one wonder do FIIs know something that retail investors don't or may be the reverse is the case. As far as we are concerned, gone are the days of 8%-9% growth rates. But this doesn't mean that stock markets will come to a total stand still or even have a massive correction. What it means is that there will be a genuine dearth of good quality stocks out there available at attractive enough valuations. Consequently, there will be that much greater emphasis on patience and superior stock selection if one were to beat the markets over the long term.

Thus, despite record FII money pouring in, should retail investors be cautious in stock selection? Let us know your comments or post them on our Facebook page / Google+ page

01:12  Chart of the day
Bullish markets often come along with bright prospects for stock brokerage business. But this time things seem different. While Sensex has touched three year highs, the broking firms are either shutting shops or scaling down. As per an article in Business Line, the job loss in the stock broking business is estimated at 40,000. There seems to be little hope for laid off employees to be absorbed back. This is because the new job vacancies in the segment are down 10% since last year. Here is a glaring example of the disconnect between the prospects of the Indian economy and the Indian stock markets. The recent gains seen in the stock markets stand on a shaky ground as there has been no improvement in the economic prospects to support the same. No wonder people are turning away from equities. Further, lower volumes, high competition and rising costs are taking a toll on the margins in the broking business and making it unviable. Unless the fundamentals of the economy improve, the situation is unlikely to turn around. Going forward, a stable government post elections and clear economic policies are the only hope for the stock broking business.

Job losses increase in brokerages

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We believe it was Peter Lynch who once opined that if investors spend at least as much time in researching a stock as they do while buying a refrigerator, they would be much better off. If you think Mr Lynch gave his advice way back, well think again. In fact, given how much information overload we face these days, it won't be an understatement to say that his words ring truer today than any time in the past. Simply because more communication channels mean that many more ways for stock price riggers and manipulators to trick us into buying wealth destroying stocks.

Case in point being an SMS doing the rounds till recently that advised investors to buy into a stock that was a sure-shot 10-bagger. A quick glance at the financials of the company or the lack of it would have revealed how empty the promises were. However, investors who were far too greedy to consider this simple exercise learnt their lessons the hard way. Within months, the stock price fell by a staggering 85%. Needless to say this resulted into huge losses for investors who bought into the promise. In the end, the market watch dog SEBI did clamp down on the perpetrators of this misdeed. But we believe it is always better to be self-vigilant than rely on external help.

As reported by The Mint, the road ministry has submitted a draft proposal to establish an industry regulator. The regulator will have powers in the areas of contract dispute resolution, enforcement of contract provisions and renegotiation of contracts. And the regulator's decisions will be legally enforceable. The proposal is in line with what the Finance Minister had proposed in his Union Budget speech. The proposal should come as a relief for the road sector which has been grappling a slowdown. In addition to the impact of the slowdown, the sector has also seen an increasing incidence of disputes. As per the cabinet note, a sum of over Rs 17,000 crores is currently stuck in pending arbitration and litigation cases. Hopefully such issues would get resolved once the regulator is set up. While the proposal is indeed a welcome one, we do hope that it is enacted soon.

The Prime Minister's Economic Advisory Council (PMEAC) has made some recommendations that could strengthen India's banking sector. Firstly, they have suggested that government should dilute its shareholding in public sector banks to 51% in a phased manner. Currently, the government shareholding stands at 58%. If the government goes ahead with the dilution at current market prices, it could garner over Rs 550 bn. This would provide banks with the additional capital required to implement Basel III norms.

In addition, the council has also recommended that the current stop-go process of issuing bank licenses should be abolished. Instead license issuance must be an ongoing process. In other words, licenses should be issued whenever an applicant meets the eligibility criteria. How will this help? By making bank license issuance a continuous process, new private players could enter the sector more easily. As per an article in Business Standard, the share of PSU banks in new credit creation stands at 70%. The entry of new private players will reduce their share. In turn, this would lower the fiscal impact of the Basel III norms. All in all, these measures would help in strengthening and deepening the banking system.

When Shinzo Abe took over as the PM of Japan, he decided to follow into the footsteps of the government and central banks of the US and Europe. Indeed, he unveiled a plan which involved doubling Japan's monetary base. The rationale behind this move was to pull Japan out of the slump and fuel growth. Has his plan, otherwise dubbed as Abenomics, achieved the desired result in the last one year? Not really. Some positive data first. Because of the excessive money printing, the yen has depreciated by around 22%. This has boosted exports. GDP also grew by around 4% in the first half of 2013. And inflation seems to have broken into the positive and this was one of the aims of Abenomics.

But all this pales in comparisons to problems that still afflict the Japanese economy. For instance, there has been no increase in wages. The real yield on bonds has continued to stay rather low even though the nominal yields have risen. This means that retired population will hardly earn much on their savings. And for a country like Japan, which has more of an aged population, this does not augur well. More importantly, such relentless money printing is only expected to put pressure on Japan's debt levels. And the latter has already reached unsustainable levels. All in all, as is the case with the US and Japan, we are of the view that this kind of money printing will only delay a crisis rather than solve it. More emphasis on structural reforms is what Japan will have to focus on to improve its fortunes in the longer term.

Indian stock markets have bounced back from day's lows but are still trading in the red. At the time of writing, the benchmark BSE Sensex was down 175 points (0.85%). Capital Goods and Realty stocks were trading weak while IT stocks were trading strong. Asian stocks were trading strong. Japan and Hong Kong stocks were the biggest gainers. The European markets also opened on a firm note.

04:55  Today's investing mantra
"The way you lose money in the stock market is to start off with an economic picture. I also spend fifteen minutes a year on where the stock market is going. All these great, heady, thinking deals kill you." - Peter Lynch
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3 Responses to "What do FIIs know that small investors don't?"


Nov 11, 2013

US tapering is delayed to help FII and to provide immunity before vertical erosion of wealth due to tapring but one day they will definitly move out for subscribing Bond and market will achive 2008 level chances of correcting property market can not be ruled out


H K Prakash

Nov 11, 2013

The FIIs may be even smarter than you think. One lot brought in $$$ last month and took the Nifty upto 6300+. Now another lot is quietly booking profits from earlier purchases and going home for XMas. Nifty is headed for 56/5700. When more funds come in after the New Year, Nifty will again be taken for a spin: 6300? 6500? 7000?
The stupid Govt should have put limits on foreign equity from the beginning and we would not be facing the volatility we are facing now. 200 pts NF in a day, 7-800 points NF in a month. Beggars cant choose! We have to trade very very carefully day to day without carrying positions overnight!


sn malhotra

Nov 11, 2013

Should retail investor invest in FII patronised stocks?
I believe it depends on whether the investor follows a discipline of booking profits - unfortunately many dont. For the latter category it is best they avoid the FII stocks to save themselves from steep rise in prices followed by steeper falls.

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