Bang On

[INSERT_1]

One of the leading financial websites recently conducted its investor survey. Here the investors were asked about what they think significantly impacts the Indian stock markets on a macro level. Nearly 43 per cent answered that it was the buying and selling by foreign institutional investors (FIIs). But this finding should not surprise readers of Dalal Street Investment Journal. If our readers could recollect, in Issue no 2 dated January 4-17, 2010 we had carried a cover story titled ‘Seven Reasons Why FIIs Will Keep Pumping Money Into Indian Markets’. Here we had proved the strong correlation between FII investment and Sensex movement with all the facts and figures. But as they say, proving something has no importance in the stock market. But yes, correctly predicting something gets high regards. So, surely we don’t want to take any credit for proving the high correlation between FII investment and Sensex movement. But we would like the investors to delve into what we had predicted in the cover story.

As the title indicates, we had predicted that FIIs will pump in more money in India in 2010. We had also provided seven reasons for the same. But what further proves our credentials is that we had predicted the same when India had already received a huge chunk of FII money to the tune of Rs 80,500 crore in 2009 and most of the investors on the street were skeptical about India receiving another round of FII investments. But while the others were skeptical, we had clearly predicted that the FIIs would continue to channel their funds into India. Today when we look at the data, FIIs have been net buyers to the tune of Rs 59,801 crore, clearly indicating towards better quality of our analytical skills. However, some may feel that it was a fluke. But we would like to remind the investors that we had provided seven reasons for the same. So, let’s see how many of these factors took the shape of reality.

First and foremost, we had said that global liquidity would be there and find its way into the Indian markets. We had categorically stated that the global economy is still flush with liquidity and will remain at this level till the second quarter of 2010. This is precisely what has happened. The data suggests that excess cash in the US banking system is close to a trillion dollars. Similar is the situation with the Japanese government which is flush with liquidity. Further, continuing the stimulus and maintaining a status quo on lower interest rates is a clear indication of efforts undertaken to maintain this liquidity. As regards the inflows, India has emerged as a star performer in terms of attracting foreign inflows into the domestic equity market. Further, we had stated that we would receive less of hot money (through the PN route). Money received through the PN route is still below 16 per cent, thus proving us right.

The second factor was that of the India growth story. We had confidence in India’s growth trend on account of its domestic consumption levels. We had stated that once the global recovery was back on the track, India’s GDP would accelerate further. Again we have been proved right and the recent data shows that in the period April to June 2010 the GDP growth was 8.80 per cent. The International Monetary Fund has revised the growth estimates to 9 per cent for 2011. This clearly has turned out to be a strong reason for attracting the FII funds.[PAGE BREAK]

[INSERT_2]

Third, we had also made a mention about the diversified opportunities in India as against the other markets like Russia and Brazil which are commodity players or even China which is an export-oriented market. This factor has played a vital role in getting the FII money as India has provided a wide range of possibilities across many sectors. We had also stated that India is less volatile and more transparent to the international investor community. So while doubts were raised against transparency in China, India has scored well on this point. Therefore this argument held good too.

Our fourth factor was about the opportunities offered by the small-cap and mid-cap companies. Here we had categorically mentioned that it would be a stock-specific market wherein the market may remain range-bound but some stocks may provide returns of up to 300 per cent. Now in 2010 while the markets have remained range-bound, many mid-cap companies have received investments from FIIs and provided strong returns. Further, the mid-cap index (up by 15 per cent in 2010) has outperformed the Sensex (up by only 3 per cent). Here, we had also mentioned about the earning upgrades taking care of the higher valuations. If we take a look at the corporate results, surely the earnings have been good (as mentioned in our quarterly results analysis stories).

As a fifth factor, we had pointed out the carry trade opportunities, which means borrowing in lower yielding (US dollar or Japanese yen) assets and investing in higher yielding (rupee) assets to pocket the difference. Carry trade offered great opportunities in 2010 and more than 500 billion as dollar carry trade happened in the first half of 2010. We were proved right here too. We would also like to take credit for stating that the US Fed is expected to hold its interest rates at its current range of 0.0-0.25 per cent until the end of Q3 of 2010 after which it may embark upon a slow process of policy normalisation with a slight increase of 0.5 per cent during the last quarter of 2010. Other major central banks such as the European Central Bank and Bank of Japan are expected to follow suit. And that is what has happened in the first half of 2010.

Next, we had also made a mention about the US Dollar Index having an inverse relationship with the Sensex. Here, while Sensex has remained range-bound the Dollar Index has also remained range-bound and has only moved up to 82.41 from the level of 77.29 (up by 6.62 per cent).  So, with lower opportunities in the Dollar Index, money has been diverted to assets in the emerging markets.

And finally, it was about political stability. We feel that political stability along with the government focusing on reforms has also resulted in FII money coming to India. The infrastructure growth, divestment of PSUs, changes in the takeover code, and bills for GST and DTC are some of the relevant factors that attracted FII funds.

With all the seven factors turning out to be correct in the real scenario, it only goes to prove our excellent credentials in terms of analytical ability. But the moot question is whether these factors still hold the ground or not. We feel that while liquidity, the India growth story, diversified opportunities, opportunity in different capitalisation stocks, and political stability will continue to hold true, there will be some uncertainty over the carry trade opportunity. One cannot take a call on the performance of the US Dollar Index. In our opinion, the steady holding of the five factors does not necessarily mean that the FII inflow will be sustained. Valuations are getting stretched and hence some profit booking may happen if the September quarter results are not up to the mark. However, if the September results happen to be good, the market may touch a new peak and FIIs will have a major role to play in that.