»Straight from the hip by Jawahir Mulraj

FIIs ruling the roost
24 JULY 2010

Look at the net purchases of foreign institutional investors and domestic funds, for the first 4 days of the past week for which data is available:

Rs crores
 FIImutual fundsSensex

It was the foreign investors who pumped money into the Indian market; domestic institutions were net sellers. The largest asset manager in the world today is Blackrock, which controls $3.3 trillion in financial assets as per an article "America's 300 biggest money managers" in the July/Aug issue of Institutional Investor, of which the columnist is India representative. India's GDP is $ 1 trillion. Foreign funds flow can thus swamp any domestic flow.

As per the article, "Investors have finally bought into the argument that they should diversify away from their home countries and buy more international equities. Asset managers with global capabilities, such as giant Franklin Templeton, saw huge inflows in 2009. Investors pulled $39 billion out of domestic equity funds but stashed $30 billion in foreign equity in 2009."

Now the questions that need to be asked are 1. What will scare foreign investors away and 2. What are we doing to make them stay longer?

One of the factors that would scare foreign investors away would be panic situations like bank failures. Luckily the stress test of some 91 European banks revealed only 7 to be in danger, and requiring only $ 4.5 b. in additional capital. Investors were sceptical about the rigour of the testing; they had anticipated more banks to be threatened and more capital to be additionally needed. Of the 7, there were 5 regional Spanish banks called cajas, which would not be expected to threaten the system, and only 1 state owned German bank, Hypo Real Estate which obviously had overextended itself in mortgage loans.

Any failure of a financial institution could cause the FIIs to run to safety. Or perhaps a political crisis such as the threat by gadfly North Korea, which is threatening use of nuclear deterrent to prevent joint military exercise by the US and South Korea.

Domestically, the Indian economy is doing well, and slated to grow at 8.5% this year. Good monsoons will boost agricultural production on which 60% of the population depends, which would give them some spending power. However, to continue growing at this, or at a faster pace, two needs have to be met. The road network has to grow faster; Minister Kamal Nath has an ambitious target of 20 kms/day but we are yet to reach that clip. He seems confident of getting there. And the rail network has to also grow; Minister Mamta Banerjee seems to have less time for this than for seeking to become the next Chief Minister in West Bengal.

Fortunately the Government seems to be back on the reform track. After taking the decision to hike prices of petrol and diesel, it is now moving ahead on the GST (goods and services tax) front. This, by introducing simple and uniform indirect tax rate structure, with no leeway to State Governments, who will be compensated for loss of tax revenue on some items which accrue to them, will have a transformative effect on the economy. Issues still need to be sorted out, but we are on the right track.

The Unique Identity project is another step in the right direction, with a very competent person to head it. One hopes it will hugely stanch the leakages that take place in welfare scheme handouts. The corrupt middlemen, who are the current beneficiaries of the largesse, with, perhaps only 20% reaching the needy, would try their best to spoil the UADAI project; one hopes they are not allowed to.

In capital markets, SEBI is contemplating raising the bar to make open offers, to 25%, from the current trigger of 15%. After 25%, the acquirer would have to make an offer for the entire shareholding, thus not favouring existing promoters. The raising of the bar would help minority shareholders as raiders will be now able to acquire more stock, and existing management more keen to prevent it by buying more, themselves. The risk, as broker Arun Kejriwal points out, is that the shareholding needed to block special resolutions is 26%, uncomfortably close to the proposed new bar of 25%. An acquirer with 24.9%, together with a benami holder of 1.2%, purportedly not acting in concert, may use this to blackmail existing management by preventing any special resolution.

Corporate results for 65 companies are encouraging. Sales grew by 28%. Though raw material costs grew a whopping 61%, as commodity prices shot up, the operating profit growth was 23% and net profit growth was 33%. Higher net profit growth was witnessed in Zee and Sesa Goa.

The BSE-sensex ended the week at 18130, up 175 points, whilst the Nse-Nifty ended at 5449, up 55.

One needs to see the reaction of investors to the results of the stress test on Monday. If they believe the test was rigorous, and that there is no crisis in the Eurozone as hitherto believed, we would see a rally. If, on the other hand, they believe that the stress tests were weak, or the results fixed like a T20 match, then we would see a slump. There still are far too many problems in the developed economies. Thats good news for us because investors are willing, now, to look at increasing emerging markets exposure; they were sceptical earlier. As long as we govern ourselves well and don't shoot ourselves in the foot, we will continue getting more inflows. Together with increased domestic flows as the GDP grows at a fast clip, the story looks good for a long time. The biggest danger is with poor public governance. Lets hope they get that in Delhi.

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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