The Indian equity markets touched record highs last month. Most analysts have attributed the current rally to just liquidity as Foreign institutional investors (FIIs) have pumped in nearly US $3.5 bn into Indian stocks ever since the US Fed Reserve delayed tapering of its monetary stimulus at a meeting on 18 September, 2013. FIIs have further strengthened their position in the Indian equity market, with their aggregate holding in 50-share Nifty companies touching a high of 18.1% during the September quarter, against 17.9% in June and 18.1% in the March quarter.
But after touching record highs, the markets have fallen by over 850 points over the past eight trading sessions. So is the FII party over? According to the Economic Times, FIIs have liquidated long positions worth Rs 40 bn in index futures of the November series so far. In the month of November, FIIs bought equities worth only Rs 2.2 bn as compared to Rs 180 bn in the month of October. This could indicate that FIIs are starting to become bearish on Indian stocks.
In the stock market, a deal is done on one day and the actual delivery takes place after a few days. When the price of a share is expected to rise, people buy it with the intention of selling later at a profit. This is called 'long position'. In the opposite case, when the price of a share is expected to fall, people sell it with the intention of buying it later at a cheaper price and make delivery. This is called the 'short position'.
So in this situation what should retail investors do? Well, not be worried about the daily stock movements; regardless of whether they are caused by large FII inflows or outflows. Sectors such as consumer stocks and large-cap FMCG, information technology and pharmaceuticals have been the front-runners in the recent market rally. And as such, they now trade at stiff premiums to the market. Given the preference for these companies by FII, it would not be wrong in saying that they carry substantial downside risk in the event of a correction.
In case of scouting for inexpensive stocks, it would be wise not to compromise on fundamentals. Further, avoiding highly leveraged companies and those with governance issues would be preferred, as it would take more than just a bull run to revive their prospects.