FIIs in driver’s seat

Tags: Stock Market

Foreign institutional investors now own 44% of the market’s free float; the risk in such heavy reliance on them is that the market will tank the moment these overseas flows dry up or reverse

FIIs in driver’s seat
With the shareholding patterns for most companies for the December quarter put out, it’s time to look at the foreign investors’ stake in Indian stocks more closely.

Because FIIs, as they are referred to in the Indian stock market parlance – short for foreign institutional investors – are pumping in money like never before. Last calendar, they invested $24.38 billion (Rs 1,28,359.80 crore) into Indian stocks, the second highest in a year after the Indian stock market was opened up for their participation in mid-1990s.

The biggest year for FII inflows was 2010, when India attracted $29 billion. Thanks to the government’s mega disinvestment over the past two-three weeks (Rs 11,400 crore share sale in NTPC and Rs 3,113 crore share sale in Oil India) and private sector Axis Bank’s Rs 4,726 crore QIP, all of which saw heavy participation by foreign investors, FIIs’ total investment into equity in 2013 has already touched $7.3 billion (Rs 39,629.80 crore).

This means barely one-and-a-half months into the New Year, FII investment has touched 30 per cent of last calendar’s total!

It is now reckoned that FIIs own 20 per cent of Indian stocks, accounting for 44 per cent of the market’s free float. That’s really huge.

Citi analysts Aditya Narain and Jitender Tokas said one needs to look beyond foreign inflows, but added that foreigners were becoming “dominant” in the Indian market.

“It’s the FII money monsoon: $24 billion in 2012 (second-highest ever), $8bn in Q4 of 2012 (Oct-Dec) and $4 billion plus in January. FII ownership (19.9 per cent) now accounts for 44 per cent of the market’s free float. This is big, making foreigners even more dominant, and should suggest a very strong equity market. But, money and the mood apart, India’s market performance has been soft (4.6 per cent) since October, 2012, lagging peers/benchmarks: we have to look beyond foreign flows,” they wrote in a note dated February 7.

A key reason for the relative underperformance of the Indian market despite the huge inflows may be the selloffs by local institutions.

“India’s domestic institutional investors (DIIs) are doing almost the opposite of foreign investors. They are selling ($10 billion in 2012, $3.4 billion in Q4 of 2012 and $3 billion in January); limiting net institutional flows to $5 billion in Q4 of 2012. And it’s because of a mixed set of reasons. Insurers becoming sellers for the first time on a financial year basis (big one), investors ‘breaking even and getting out’ and building liquidity for divestments,” said the Citi analysts. “It’s a contra trend, but does dampen the impact of FII flows,” they said.

Indian insurance companies, mostly Life Insurance Corporation of India (LIC), have been trimming their stake in listed companies in a move widely perceived as a strategy to invest in the government sell-offs as indicated by Citi analysts.

According to an analysis by JP Morgan analysts led by Bharat Iyer, insurance holdings of Indian equities at 5.6 per cent have been declining over the past three quarters. Mutual fund holdings at 3.6 per cent are also “well off the highs” though, the JP Morgan analysts said.

A major problem in heavy reliance on FIIs is that the Indian market will see a major correction the moment these overseas flows reverse or even dry up. JP Morgan analysts admitted that Indian equities are indeed “vulnerable”.

“FII ownership of Indian equities is at an all-time high. Latest available EPFR data indicates that FIIs’ overweight position on India is at a six-year high. From a technical perspective, this position highlights the vulnerability of India to global risk-off trade. The vulnerability extends to the currency as well, the large current account deficit (CAD) is being funded mainly by capital flows and underscores the need for the government to ensure revival in growth. We reiterate that there appears limited policy flexibility — fiscal and monetary — to stimulate growth in the near term,” the JP Morgan analysts said.

Morgan Stanley’s Sheela Rathi and Ridham Desai looked at the FII ownership pattern in a more detailed manner after the December quarter filings by companies.

According to their analysis, “FIIs bought in five out of the 10 sectors. Consumer discretionary turned out to be the sector with the most buying, mostly due to the decline in the sector’s weight. FIIs also added stocks from materials and industrials, while trimming positions in financials, energy and technology,” they said.

“Over the past 12 months, consumer discretionary has seen the most buying while energy and technology have seen most selling,” according to Morgan Stanley.

For FIIs, the biggest plays are on energy (-373 bps) and financials (+361 bps); in contrast, DIIs are positioned mostly in consumer staples (+525bps) and financials (-456bps), according to Citi’s Narain.

Of the top 20 stocks owned by institutions overall, HDFC saw the most buying and Infosys was most sold (for the third quarter in a row) in the December quarter. No wonder the stock reacted so significantly to its earnings surprise. Their largest overweight is ICICI Bank and the largest underweight is Reliance Industries, unchanged from the previous quarter.

Last year’s surge in inflows stands out compared with the record inflows of 2010 because of lower primary activity in 2012.

Maybe significant inflows may have come when private equity funds (PEs) sold some of their holdings last year, such as Carlyle exiting HDFC and Warburg Pincus selling out its stake in Kotak Mahindra Bank.

“Primary market activity at 11 per cent of the $24 billion FII inflows in 2012 compared with 29 per cent in 2010, when FII inflows stood at $29 billion, although there were chunky secondary market exits (PE/FDI), would have probably raised this cumulative level beyond 2010’s 29 per cent,” the Citi analysts said. zz

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