Have the FIIs lost their way amid DIIs capitalisation on market rally

FIIs failed to participate in the big runup in better-quality infrastructure cos, defence and energy transition and public-sector companies, many of which have reported vastly improved performances

From the bottom of 15,183 in mid-June 2022, the benchmark market index Nifty has soared 69 per cent to hit 25,791. In the past 18 months alone, the index has surged 52 per cent. All investor segments — individuals, mutual funds, and other domestic institutional investors (DIIs) — seem to have made good money from this bull market, except of course reckless derivatives traders. This lot has lost Rs 51,689 crore in FY24, according to a study by the Securities and Exchange Board of India, the regulator. What about foreign institutional investors (FIIs)? Surely, with their superior knowledge, long years of experience, and access to deep research and large funds, they should have reaped the largest benefit from this bull market? Here are some shocking overall numbers about their investment. Between June 2022 and September 20, 2024, FIIs were massive net sellers during a big bull market! Yes, you read that right. They recorded net sales of Rs 1.82 trillion, the biggest monthly sales coming in June 2022, exactly at the bottom of the short, depressed period between November 2021 and June 2022. Even at those low valuations, panic sales by FIIs — of over Rs 58,000 crore in June 2022 — remain unsurpassed. Indian (and global) markets were under pressure from late 2021 due to high valuation, a sharp rise in US inflation, weak post-Covid recovery in China, and the Russian invasion of Ukraine. Who did the FIIs sell to in the dark days of June 2022? To DIIs, who were huge buyers of almost Rs 47,000 crore that month, at what turned out to be the market bottom.

This trend was repeated with boring regularity. Take, for instance, January last year, when the Hindenburg allegations against the Adani group shook the market. The mini-crash was an opportunity for DIIs to buy (over Rs 33,000 crore) while panic-stricken FIIs sold shares worth over Rs 41,000 crore. Of course, even savvy investors sometimes get it wrong. But FIIs collectively took surprisingly poor calls at almost all major market turns. While they did invest strongly between May and July last year, the earliest stage of the ongoing bull market, they quickly turned bearish over the next three months, pressing net sales of Rs 76,000 crore, which were lapped up by DIIs (net purchases over Rs 70,000 crore). And so, when the market took off in mid-November 2023, it was DIIs who gained handsomely, with FIIs looking rather foolish.

Undeterred by the experience, FIIs remained net sellers every month between January and May this year barring March, when they had a timid net purchase of only Rs 3,300 crore. In the pre-election months, they sold over Rs 1.26 trillion, while DIIs made net purchases of over Rs 2 trillion. That call went wrong again for FIIs; the markets fell on the day the Lok Sabha-election results were announced, and continued to march higher. 
 

Surprisingly, even in the past four months, after the election, FIIs only made a small amount of net purchases and pressed over Rs 20,000 crore of net sales in August. However, they have been net buyers so far in September. While these figures may be influenced in a small way by large bulk deals, where one side of the transaction is not an FII or DII, the trend is unmistakable. Over the last 29 months of a strong bull market, DIIs were net buyers of over Rs 5.91 trillion and FIIs were net sellers of over Rs 1.82 trillion.

How times change! At one time, the dominance of FIIs in the Indian market was so complete that the late R Ravimohan, then managing director of CRISIL, had told this paper, “The reverence for FIIs has now metamorphosed into the mixed feelings of fear and awe.” What is surprising, though, is not that the FIIs got it wrong. Professional investors do get it wrong sometimes. Their image of being cool, competent professionals who remain calm during market euphoria and wait to buy at a fair value after deep research and exhaustive diligence is often false. But their mistakes are almost always acts of commission, not usually omission.

In a bull market, they chase the flavour of the day and act like retail investors. In 1994, they had loaded up on the global issues of asset-heavy, poorly governed Indian companies. In the bull market of 1999, they frantically charged into shady software companies, either based on imitation or rumours or joint positions with speculators/another fund, or in expectation of a price runup before overseas equity floats. The flight to irrationality, reminiscent of 1993-95, led them to create an exposure of 60-80 per cent in technology, media, and telecom companies at huge valuations. In the crazy bull market of 2005-08, they were over-committed to real estate and infrastructure companies, earning poor returns on capital.

Now, for the first time, FIIs have made mistakes of omission, not commission. They failed to participate in the big runup in better-quality infrastructure companies, defence and energy transition and public-sector companies, many of which have reported vastly improved performances. I have no idea why this has happened. After all, professional investing is a competitive business and performance is benchmarked every month. Consequently, institutional investors cannot remain immune to buying “what is working”, or what is popularly known as momentum investing. For the first time in 30 years, I notice FIIs choosing to swim against a rising tide. Now that the US Federal Reserve has started cutting rates and the Indian government’s growth-oriented policies seem to be continuing, will they now start making errors of commission?

(While there are multiple sources of data, the provisional data of cash-market investment has been used. The data from other sources may show higher FII investment.)

The writer is editor of www.moneylife.in and a  trustee of the Moneylife Foundation; @Moneylifers