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FIIs: What are they doing? - Views on News from Equitymaster
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FIIs: What are they doing?
Sep 10, 2008

The year has been a turbulent one not only for India but countries across the world. India finds itself in a difficult economic situation with the growth moderating on one hand and inflation rising on the other. Similar fate has fallen upon most of the developed and emerging economies. Unsurprisingly, the stock markets are down more than 30% from their highs. FII exposure to India has also taken a beating and is down 38% in CY08. From US$ 360bn in Decí 07, the current value is estimated at US$ 221 bn. Furthermore, the sector preferences also seemed to have undergone a change. In order to study this trend, we have tried to compare shareholding patterns of FIIs across different sectors for the period ended June 08 with the period ended June 07. Data has been gathered for 50 companies that form the Nifty.

FII holding
Sectors Jun-07 Jun-08 change
Gainers
Software 106.8 117.6 10.8
Pharma 74.9 78.6 3.7
FMCG 25.0 27.9 2.9
Telecom 46.4 46.6 0.2
Losers
Cement 48.0 30.4 (17.7)
Engineering 86.1 70.3 (15.8)
Bank 172.5 158.4 (14.1)
Auto 88.2 78.7 (9.5)
Metal 45.2 39.8 (5.4)
Media 30.3 26.0 (4.3)
Energy 68.8 64.9 (3.9)
Construction 13.6 12.0 (1.6)
Diversified 29.2 28.7 (0.5)
Power 44.3 44.2 (0.1)
(The shareholding figures are the sum of the FII holdings in Nifty companies of the respective sectors.)

The gainers
Telecom and FMCG sectors are driven by the consumption story. Rising income, increasing middleclass households and higher aspirations have created a stronger demand for these sectors. FMCG and telecom sectors have done well in these trying times. While slowdown in growth in witnessed in last couple of months, FMCG products are essential for day-to-day life and their demand can be curtailed only to a limited extent. Telecom services improve productivity and hence strong demand is expected to continue.

IT and pharma sector are sensitive to the rupee movement. Rupee is down 12% in 2008 after appreciating by a similar margin last year against the dollar. IT and pharma are both export driven sectors and hence are set to benefit from the depreciating rupee.

The FIIís have churned their portfolio towards these sectors, as they are more of defensive in nature. Not sensitive to interest rates, these sectors are a safer bet in such times.

The losers

Engineering, auto, cement and banks are leading the pack of losers.

Engineering, auto and cement sectors have faced troubled waters in recent times on account of slowdown in growth and rising interest rates (making the capital required for expansion expensive and also hinder demand). Further they are also sensitive to the commodity prices.

Tighter monetary policy, slower loan growth, decreasing net interest margins and MTM losses due to rising bond yields coupled with deterioration in asset quality and increase in NPAs has given tough times to banking space. The loan waiver by the government has further pressurised the public sector banks. Little wonder, the cumulative FII holding has fallen by 8.9% in the past 12 months.

With the inflation expected to rule at current levels over the next few months, a significant churning in the portfolios of FIIs is unlikely to happen. As and when it does come down, the losers are likely to come back in favour as significant pent up demand is already building up thanks to the good macroeconomic fundamentals from a long-term perspective. So, if you have invested in any of the interest rate sensitive sector, we would advise you to stay put. However, the company under consideration needs to be the one with strong fundamentals.

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