Investment tip: Focus on quality stocks than following FII trends
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Foreign institutional investors are faithfully pumping in
money into Indian stock markets despite concerns over the economy.
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Investors keep an eye on stock movement outside the Bombay Stock Exchange. PHOTO: AP
"Economy is bottoming out".
This is one phrase that has been used to explain any and every rise in stock markets for the last one year. Of course, the markets, after rising in the last months of 2012, have been without direction this year, confounding even the most seasoned investors.
Interestingly, foreign institutional investors, or FIIs, have been faithful and pumping in money, whereas domestic institutional investors, or DIIs, have been net sellers for the last many months now.
MONEY TODAY explores what investors should do when big institutions are themselves confused.
According to data from the market regulator, the Securities & Exchange Board of India, or Sebi, FIIs were net buyers to the tune of Rs 1,40,847 crore in 2012-13 whereas DIIs were net sellers of Rs 69,069 crore. In months when FIIs were net sellers, DIIs were net buyers and vice versa.
Despite these factors, the markets have not received steady direction this year.
The Bombay Stock Exchange Sensex has fallen 5% in the first three months of 2013. The reasons are fears over early elections, global uncertainty and currency crisis. In a currency crisis, the currency falls due to market speculation that the government may not be able to back it.
The triggers for such fear are usually depleting foreign exchange reserves and high fiscal deficit. India's current account deficit, or CAD, reached a new high of $32.5 billion, or 6.7% of gross domestic product, in the third quarter of 2012-13, which means that the probability of the rupee falling is pretty high.
WILL FII FLOW CONTINUE?
In spite of these concerns, FIIs have been pumping in money as India offers more opportunities than most markets. "Despite the recent slowdown, India is one of the fastest growing economies in the world. Its dependence on domestic demand for growth is a positive. Corporate India's return on equity relative to peers is another factor," says Sivasubramanian KN, chief investment officer, Franklin Equity India.
In addition, Europe and the US continue to look a little risky.
"Risk around the euro area and the US dominated 2012. In comparison, Asia remained healthy both in absolute and relative terms. Within Asia, India was a major beneficiary of FII inflows," says Sankaren Naren, CIO, equities and fixed income, ICICI Prudential Asset Management.
According to market experts, India was one of the good investment destinations in Asia and, hence, the inflows continued. Besides, economic reforms such as deregulation of fuel prices made a positive impact on the market.
Lack of good investment options elsewhere also kept FII inflows intact. "There are few markets which have grown and India is one of them," says Sandeep Shenoy, executive director and head of institutional research, Anand Rathi Financial Services.
However, of late, the currency crisis has become a concern for FIIs. In the first eight days of April, FIIs have sold stocks worth Rs 371.6 crore. "We need to consider that FII flows can be volatile. To build market view solely on the basis of such flows can be risky," says Naren of ICICI Prudential.
DOMESTIC TRIGGERS
Retail investors and high networth individuals are shifting money from equity to debt to protect their investments from stock market volatility. Besides, they are booking profit to recover losses that they suffered during the crash of 2008. "The tendency of investors who have faced a rout in the past few years is to redeem whenever the markets rise," says Shenoy of Anand Rathi.
In India, most investors have been bullish on two assets-gold and real estate. So, when these face a slowdown, they will turn to equity. In general, retail investors have allocated very less to equity. Any positive news in terms of industrial growth, inflation, liquidity and improvement in the global economic situation will be hugely positive for the markets. Also, FII inflows may lower the CAD to an extent.
MARKET FUTURE
Experts say there may be limited downside from here on. "We believe that the earnings for the fourth quarter of 2012-13 will be a bit lower than expectations, which will ensure that the markets will be range-bound with a high degree of volatility till the middle of 2013-14. Thereafter, a slow uptrend could start," says Anand Rathi's Shenoy, who is still maintaining a Sensex target of 22,500-23,000 for 2013.
Rather than look at the broader market, investors are searching for pockets of value. Many are betting on large-cap stocks. "If we look at the large-cap indices, apart from FMCG and some quality names in pharmaceutical, information technology and banking, they have not shown any material appreciation in the past couple of years," says Naren of ICICI. The upside will depend upon progress on economic reforms and global liquidity and commodity prices.
"Political developments will be a key risk over the near term," says Sivasubramanian of Franklin, adding that he is still positive on sectors that depend upon domestic consumption and investment themes.
RETAIL INVESTORS
Despite all these uncertainties, the stock market gave nearly 25% returns in 2012. However, experts do not expect a similar rise in 2013. "The upside will depend upon how long and deep the slowdown is, which again is going to depend upon a mix of domestic factors such as policy reforms and external factors like global liquidity and commodity prices," says ICICI's Naren.
While many experts believe that there is limited downside from here on, none of them is willing to say this will full certainty. "Indian equity markets are trading below long-term averages and various pockets appear undervalued. We believe current market valuations present a good buying opportunity for long-term investors," says Sivasubramanian of Franklin Templeton.
Experts do not see an uptrend in the near term. However, for those with a long term horizon, equity seems to be a good investment, but with caution. People who are looking at good returns within a year must not invest in equity. However, since equity cannot be completely ignored, one can look at investing in products that have both debt and equity components.
"Investors should consider investing in balanced funds, which offer a reasonable opportunity to participate in equity with relatively lower risk and generate better risk-adjusted returns from both equity and debt components," says Naren.
This is one phrase that has been used to explain any and every rise in stock markets for the last one year. Of course, the markets, after rising in the last months of 2012, have been without direction this year, confounding even the most seasoned investors.
Interestingly, foreign institutional investors, or FIIs, have been faithful and pumping in money, whereas domestic institutional investors, or DIIs, have been net sellers for the last many months now.
MONEY TODAY explores what investors should do when big institutions are themselves confused.
According to data from the market regulator, the Securities & Exchange Board of India, or Sebi, FIIs were net buyers to the tune of Rs 1,40,847 crore in 2012-13 whereas DIIs were net sellers of Rs 69,069 crore. In months when FIIs were net sellers, DIIs were net buyers and vice versa.
Despite these factors, the markets have not received steady direction this year.
The Bombay Stock Exchange Sensex has fallen 5% in the first three months of 2013. The reasons are fears over early elections, global uncertainty and currency crisis. In a currency crisis, the currency falls due to market speculation that the government may not be able to back it.
The triggers for such fear are usually depleting foreign exchange reserves and high fiscal deficit. India's current account deficit, or CAD, reached a new high of $32.5 billion, or 6.7% of gross domestic product, in the third quarter of 2012-13, which means that the probability of the rupee falling is pretty high.
WILL FII FLOW CONTINUE?
In spite of these concerns, FIIs have been pumping in money as India offers more opportunities than most markets. "Despite the recent slowdown, India is one of the fastest growing economies in the world. Its dependence on domestic demand for growth is a positive. Corporate India's return on equity relative to peers is another factor," says Sivasubramanian KN, chief investment officer, Franklin Equity India.
In addition, Europe and the US continue to look a little risky.
"Risk around the euro area and the US dominated 2012. In comparison, Asia remained healthy both in absolute and relative terms. Within Asia, India was a major beneficiary of FII inflows," says Sankaren Naren, CIO, equities and fixed income, ICICI Prudential Asset Management.
According to market experts, India was one of the good investment destinations in Asia and, hence, the inflows continued. Besides, economic reforms such as deregulation of fuel prices made a positive impact on the market.
Lack of good investment options elsewhere also kept FII inflows intact. "There are few markets which have grown and India is one of them," says Sandeep Shenoy, executive director and head of institutional research, Anand Rathi Financial Services.
However, of late, the currency crisis has become a concern for FIIs. In the first eight days of April, FIIs have sold stocks worth Rs 371.6 crore. "We need to consider that FII flows can be volatile. To build market view solely on the basis of such flows can be risky," says Naren of ICICI Prudential.
DOMESTIC TRIGGERS
Retail investors and high networth individuals are shifting money from equity to debt to protect their investments from stock market volatility. Besides, they are booking profit to recover losses that they suffered during the crash of 2008. "The tendency of investors who have faced a rout in the past few years is to redeem whenever the markets rise," says Shenoy of Anand Rathi.
In India, most investors have been bullish on two assets-gold and real estate. So, when these face a slowdown, they will turn to equity. In general, retail investors have allocated very less to equity. Any positive news in terms of industrial growth, inflation, liquidity and improvement in the global economic situation will be hugely positive for the markets. Also, FII inflows may lower the CAD to an extent.
MARKET FUTURE
Experts say there may be limited downside from here on. "We believe that the earnings for the fourth quarter of 2012-13 will be a bit lower than expectations, which will ensure that the markets will be range-bound with a high degree of volatility till the middle of 2013-14. Thereafter, a slow uptrend could start," says Anand Rathi's Shenoy, who is still maintaining a Sensex target of 22,500-23,000 for 2013.
Risk around the euro area and the US dominated 2012. In comparison, Asia remained healthy both in absolute and relative terms.
SANKAREN NAREN
CIO, equities and fixed income, ICICI Prudential Asset Management
"Political developments will be a key risk over the near term," says Sivasubramanian of Franklin, adding that he is still positive on sectors that depend upon domestic consumption and investment themes.
RETAIL INVESTORS
Despite all these uncertainties, the stock market gave nearly 25% returns in 2012. However, experts do not expect a similar rise in 2013. "The upside will depend upon how long and deep the slowdown is, which again is going to depend upon a mix of domestic factors such as policy reforms and external factors like global liquidity and commodity prices," says ICICI's Naren.
While many experts believe that there is limited downside from here on, none of them is willing to say this will full certainty. "Indian equity markets are trading below long-term averages and various pockets appear undervalued. We believe current market valuations present a good buying opportunity for long-term investors," says Sivasubramanian of Franklin Templeton.
Experts do not see an uptrend in the near term. However, for those with a long term horizon, equity seems to be a good investment, but with caution. People who are looking at good returns within a year must not invest in equity. However, since equity cannot be completely ignored, one can look at investing in products that have both debt and equity components.
"Investors should consider investing in balanced funds, which offer a reasonable opportunity to participate in equity with relatively lower risk and generate better risk-adjusted returns from both equity and debt components," says Naren.
