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Welcome December - Views on News from Equitymaster
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  • Dec 1, 2003

    Welcome December

    'Markets lose ground on concerns over the status of Foreign institutional investor (FII) inflows into Indian equities'. These kinds of statements were prominent in the media citing reasons that the markets are on wobbly grounds in the wake of uncertainty over the inflow of FII monies into the Indian stock market. There are some concerns amongst investors that the 'big money' might be pulled out in the month of December as fund managers across the globe opt for their annual vacations vis-a-vis the stock markets. Further, since their bonuses are linked to the amount of profits earned by the funds managed by them, they would be squaring off positions and booking profits so as to maximize their bonuses. In this article, we try to throw some light on the actual FII 'December behaviour' and decide how much of the concerns are warranted.

    To arrive at some conclusion, on looking at the data provided by Securities and Exchange Board of India (SEBI) for the FII inflows into Indian equities, one would notice, quite contrary to popular belief (including ours previously), that the concerns over the drying up of FII money is not valid. This is because, in the last 5 years, there has been only one instance when the FIIs pulled out of Indian equities. (See table below)

    FIIs Net
    Investments (Rs m)
    Dec-98 2,300 9%
    Dec-99 15,762 8%
    Dec-00 (5,768) -1%
    Dec-01 2,502 -1%
    Dec-02 4,268 5%

    It can be seen in the table above that it was only in the month of December 2000 that FIIs were net sellers of equities in the domestic markets. On the other 4 occasions, they actually pumped in money, which is partially reflected in the gains on the index (Sensex performance). Of course, here we are not saying that because of FII money, the index managed to perform. Because, if this would have been the case, then the Sensex performance for the month of December 2001 should have had been similar to the other months (barring December 2000).

    On the basis of the above, a couple of conclusions can be arrived at. First, the concerns that FIIs pull out money in the month of December, which leads to weakness in the stock markets, does not hold true. Secondly, it is not necessary that when FIIs withdraw the money, the markets 'have to' fall or when they put in money, the markets 'have to' rise. The cases in point here are the December months of 2000 and 2001. However, at the same time, one may argue that the situation this time is different to the extent that compared to less than US$ 3 bn in 2001 and under US$ 1 bn in 2002, this time around, the amount invested in Indian equities is a staggering (according to Indian parlance) US$ 5.1 bn and this gives the creeps that some money could flow back. However, it must be noted that barring a 3-4 days in the month of November, FII inflows have, as yet, shown no signs of slowing down.

    This time the difference is in the way India is being perceived by the international investor community. India has been able to command respect in the international arena, and this would help foreign investors to stay put on the Indian economy and the Indian markets. Further, selling pressure by FIIs cannot be linked to the fact that their performance is judged by the profits made by them in a year. This is because gone are the days when the performance of a fund manager was based on actual profits booked. Currently, the Net Asset Value (NAV) is enough an indicator of the performance of the fund manager.

    It won't be surprising, if similar concerns of the likelihood of FIIs pulling out money from stock markets surface again next year during this time. However, long-term investors can avoid looking at the monthly performances of the stock markets. In fact, such temporary corrections in the markets should be viewed as an opportunity to buy into quality stocks. So, stay invested, as the Indian story is not over yet and 'Welcome December'!



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