Markets: Under scanner! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Markets: Under scanner!

Sep 23, 2005

The chart-bursting rally over the past couple of weeks may have left market participants rejoicing and swearing on their 'bullishness' over the oft-repeated 'India story', but the governing bodies (Securities and Exchange Board of India (SEBI), CBDT and Ministry of Finance to name a few) seem to be losing sleep over it. Once bitten twice shy (after instances such as Black Monday), the Finance Ministry has roped in several investigating bodies to probe into market manipulations that are rampant in mid and small caps during bull runs.If the reader is still wondering about the gravity of the situation and the rationale behind the market's impulsive reaction to the same, let us bring certain facts to your notice.

One of the main premise on the basis of which the 'India story' is cited to be attractive is the fact that foreign investors have increasingly hiked their exposure to Indian equities over the past couple of years. However, if one were to probe into the quality of such foreign fund inflows, the results are not very comforting.

Direct investment - churning portfolios
A study of the direct foreign investment into Indian equities shows that, despite the upturn in capex cycle, the incremental inflows in the form of FDI (foreign direct investment) have remained stagnant over the past couple of years. On the other hand, it is the earnings in domestic markets that are being re-invested (i.e. portfolios are churned) and adding to the net fund flows. This is primarily because the rate of return in domestic markets continues to be relatively attractive as compared to that in the overseas markets and foreign investors do not seem to wish to take home their fortune as yet! Also, the increasing disparity in exchange rates (e.g. US dollar depreciation vis-a-vis the rupee), is further improving the rate of return. No wonder, the FDI to GDP ratio remains a meager 5% for India at the end of FY05 as against 30% for Thailand and 35% for China.

Portfolio investments - FIIs rule
While the above facts relate to individual investments, a study of the 'portfolio investments' also indicates that only a small quantum of the foreign money is parked with a long-term perspective and a major portion is repatriatable. This is because, despite the government's consistent efforts to encourage equity investment in Indian companies through the ADR/GDR route, such investments comprised a meager 7% of the total foreign portfolio investments in the country in FY05 (Source: RBI).

On the other hand, the fact that the quantum of Foreign Institutional Investors (FIIs) flows has shot up in the last two years raises some concern as such funds are notorious for being 'hot money'. The Fed's relentless effort to raise interest rates (despite hurricane devastations) and pressure of energy crisis on the Indian economy may well prove to be triggers for the 'pull back' of the FII money in the near future. Given the excessive proportion of such funds in Indian equities, an adverse impact of the pull back will be inevitable on the Indian indices.

The mantra for retail investors...
"A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learn some very old lessons", said the legendry investor Warren Buffet. It thus goes without saying that the retail investors need to prove themselves a wiser lot this time by staying away from the market mayhem and not speculate over the day-to-day movements.

Investing in fundamental stories with a long-term perspective has time and again proven to be the saving grace whenever the markets have tried to orphan the retail investor. These principles are advocated by us not just to douse your worries about being an insignificant player in the market but also to reassure you of our faith in some of the robust fundamental stories of India Inc.

Equitymaster requests your view! Post a comment on "Markets: Under scanner!". Click here!


More Views on News

Top 5 Stocks Mutual Funds Bought and Sold in March 2021 (Sector Info)

Apr 16, 2021

A look at what India's top equity mutual funds bought and sold in March 2021.

Kotak India EQ Contra Fund: Eliminating Emotional Bias (Outside View)

Apr 16, 2021

PersonalFN's analysis on the features and performance of Kotak India EQ Contra Fund.

A Warning About Bubbles (Fast Profits Daily)

Apr 16, 2021

Those who don't learn from financial history are doomed to lose their money.

11x Bankruptcy to Bluechip Stock: A Rare India Revival Story (Profit Hunter)

Apr 16, 2021

There is no stopping this 11-bagger stock from significant upside.

Market Crash: Picture Abhi Baaki Hai? podcast (Views On News)

Apr 15, 2021

Rahul Shah on whether another big crash is likely and the ideal strategy to counter it.

More Views on News

Most Popular

India: Recovery Stalled by Vaccine Games? (The Honest Truth)

Apr 13, 2021

Ajit Dayal on how India's vaccine strategy will impact the markets.

4 Stocks to Make Your Portfolio Immune to the Second Covid Wave (Profit Hunter)

Apr 6, 2021

Rather than predicting the market, successful investing is more about preparing well and placing your bets accordingly.

An India Revival Stock I'm Bullish On... (Profit Hunter)

Apr 9, 2021

This could take India to the position of 3rd largest economy.

Why Did the Market Crash on Monday? (Fast Profits Daily)

Apr 13, 2021

In this video, I'll you what I think is the real reason behind yesterday's market crash.

A Unique Sector for Short-Term Profits (Fast Profits Daily)

Apr 12, 2021

This ignored sector could deliver big short-term profits.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Apr 16, 2021 (Close)