Foreign Institutional Investors or FIIs play a very influential role in the Indian markets. As per an article printed in the Business Standard recently, FIIs have deployed close to US$ 200 bn in the Indian markets. And given the relatively lesser amount of capital deployed into the equity markets by the domestic institutions, makes the Indian markets very vulnerable to market participation of foreign investors. 'There is no domestic institution that has the firepower to handle even US$ 5 billion of foreign selling.' reports the daily.
This is essentially why their participation is considered very important, especially when taking a broader view on the markets. Any news, negative or positive from the country tends to make the markets move in a sharp manner and that too in a short span.
The concerns over the past many months were over the recovery of the US economy, which would drive foreign money out of emerging markets and back into the home country. Also, the scenario of things moving along at a slow pace back home in India has been a concern in the eyes of the foreign investors; who have the option to park their money in other emerging markets as well.
Having said that, things have not gone as expected. The slowdown in the US will seemingly be prolonged. Plus, the past two weeks seemed to have given the Indian markets a sign of hope of things improving from here on. And more importantly at a faster pace! The author of the article makes a point that while indications of reforms have been made in the recent past, there has been no real result as yet. As such, if the improvements and reforms progress do not happen soon, FIIs would eventually lose their patience. And according to him, the only reason India remains attractive is the hope of reforms in governance; especially considering that the broader economic parameters that have been moving in the not preferred directions.
'There cannot be a structural bull market in India in the absence of these reforms, and investors might give up and pull out if we do not deliver these structural improvements. If we experience three years of sub-five per cent growth, no political appetite for structural reform, and investors holding stocks that are expensive, surely at some stage someone will ask: why are we invested in this country?' he states.
Given the volatile earnings trend over the past few quarters, we thought gauging valuations by looking at the price to book value method would be better. Until June 2011, the BSE-500 and the frontline BSE-Sensex stocks were trading at pretty much the same valuations. However, since then one can see the huge difference that has come about. Be it the poor earnings or negative overall sentiments, majority of the stocks have moved lower.
What does this mean for investors? It basically throws up opportunities to find companies lower down the market capitalisation ladder. Whether the current valuations are justified for the bluest of blue chips is altogether another discussion which we will leave for another day.
We also believe that one should not really worry about FIIs and their views on the Indian markets. Sure, if they begin taking money out, it would lead to very volatile times. But at the same time, the 'quality' stocks would become cheaper, which is essentially what long term value investors would love. As such, one could treat such liquidity risk as his friend.