Market movement is generally considered to be synonymous with FII (Foreign Institutional Investors) flows. An increase in FII flow means rising markets, while withdrawals usually result in markets coming off. This addiction to FII flow holds true even today, though it now requires heavier doses of flows to take the market higher.
FIIs have till August 2012 end invested Rs 63,156.80 crore, their highest ever investment in the first eight months. Yet the benchmark BSE Sensex has increased by only 11.91%. This too is thanks to the strong rally in the first two months of the year.
Between January and February 2012, FIIs invested Rs 36,307 crore which took the Sensex up from 15,534 to 17,752 a gain of 14.28%. Sensex had touched a high of 18,523.78 on February 22nd 2012.
FII flows slowed down after this date. In March 2012, inflows were Rs 7,730 crore while over the period of next three months FII withdrew only Rs 1,957.60 crore. Despite this small withdrawal, markets fell from the high in February to a low of 15,748 on June 4, 2012.
Dependence on liquidity and shallowness of the market can be highlighted from the fact that it took less than Rs 2,000 crore for the market to retrace most of the gain that which was possible after infusion of over Rs 36,307 crore.
Between July and August 2012, FII flows again picked up resulting in an inflow of Rs 21,076 crore. This helped the market move back to 17,429 after touching a high of 17,972 in late August.
In earlier years (See Table) smaller investments by FIIs would have propped up the markets higher. This means that FII flows are either being matched by higher selling or the money is being invested in non-index stocks. Both these points seem to be true.
Domestic Institutional Investors have been sellers during the year facing higher redemption with over 1.1 million folios witnessing closure. There are also no takers for leverage offered by brokers, indicating the general apathy to the markets.
Further, out of the 30 stocks in the Sensex only half have performed better than the indices, while eight of them have given negative returns. A report by BNP Paribas says that 15 stocks accounted for 65% of the FII purchases. This is also reflected in near all time high valuations in the stocks where they have invested.
With most of the global brokers maintaining a cautious outlook, the one event that can leave the market gasping for air will be a country downgrade, which can be a possibility given the state of affairs in the country.
The same BNP Paribas report says that investment in India is largely from Hedge Funds with nearly 50% of the money coming in is from unknown sources. Larger FIIs have been seller in the Indian markets throughout the year. In other words the money that has come in is hot money. Any negative trigger would result in an outflow. Given the depth of the market, like all addiction even this can be fatal.
