FIIs are the first to sniff out any positive or negative developments

FIIs' return brings fresh rush of adrenaline to stock investors

THE foreign institution investors (FIIs) net buy figure of over Rs 1,800 crore on August 7 has bought renewed confidence among the investors. Though this might signal as a fresh sign of market recovery, retail investors need to be very cautious and try to play with the trend, say analysts. According to data for the past 18 months, past market movements show that the market has moved in the direction of FII trend.
    At the same time, the selling from FIIs has been absorbed by the retail investors and the other dominant player — domestic institutional investors (DIIs), both of them have played in the divergent direction of FIIs. The data also shows that FII selling was highest in Nov-Dec when the market was at peak, while retail and DIIs were lapping up the stocks before the crash.
    Experts say that this has been the trend throughout the past corrective phases also. "Part of the buying by DIIs during the peak can also be explained by the fact that inflows in equity MF schemes were robust at that time and a lot of NFOs were launched. This might have forced them to invest. Why they did not wait and stay in cash is anybody's guess," Sanjeev Kumar Gopalakrishnan, COO & head, research, Justtrade.in (a Bajaj Capital venture).
    FIIs started selling in the second half of Oct 2007 itself as the graph shows and the ban on Participatory Notes announced on Oct 17, 2007, might have been the trigger. FII and DII are the two dominant groups in the cash segment of the Indian stock market. Their net investment has been in divergent directions, particularly since November 2007.
    FII liquidation is the root cause for the current bearish phase, as the net inflows from DIIs have been healthy. Experts feel that the market could find stability if further disinvestments by FII comes to a halt. Any return of improved liquidity from FIIs will be a strong positive sign for the Indian market.
    FIIs have emerged as net sellers in the cash segment of Indian stock markets since November 2007, however, irrespective of the market direction, DIIs have been the net investors since October 2007.
    The retail investors also extended the helping hand to the FII cash outflow by buying into the markets.
    Market watchers say that FIIs are savvy investors and update with global occurrences, they are the first ones to sniff any positive or negative developments. "Active retail investors should keep a strict watch on the FII figures and invest accordingly. While, long term investors need not worry about the same in the same degree. They should more focus on investing in fundamentally sound companies," says Avinash Gupta, AVP, Bonanza Portfolio.
    In the past few months, market movement has completely been dominated by the global events and therefore majority of them started to liquidate their portfolios, whereas Indian investors were in denial mode.
    "Nobody can match the FIIs in terms of sheer size and hence when they start selling the markets come down. Selling pressure from FIIs was particularly steep in the months of January '08 and June '08. However, things seem to have turned around a bit in July 2008 when they net sold only approximately Rs 1,000 crore as compared to net sales of more than Rs 10,000 crore in June 08.
    Another factor supporting the turnaround in FII sentiments is likely to be the SEBI Board meeting next week, to review the FII regulations, particularly a review of the ban on PNotes. Any positive developments on that front might turn the sentiments suddenly and sharply. Probably the net buying of Rs 1800 crore in cash and Rs 2332 crore in Index futures yesterday reflects their optimism from the SEBI Board meet and is a sign of things to come," feels Mr Gopalakrishnan.
    The cumulative disinvestment by FII from November 2007 is $21 billion, whereas DIIs have invested $15 billion during the same period. Sensex also disconnected from the FII trend in November 2007, until mid-January 2008, before falling in line with the direction of FII net interest.
    BSE and NSE data pertains to all transactions put through these exchanges. So, it reflects the net position of various market players in their secondary market operation. The category wise turnover data is sourced from BSE and NSE and is from April 2007, since when the exchanges made the category wise break up available.
    The 21 Jan '08 and 22 Jan '08 are the two most significant dates on which Sensex cracked 1000 points in two consecutive days on its downward movement, when FIIs withdrew $2 billion and DIIs pumped in $1.6 billion. Retail again was a net buyer to the tune of $872 million while proprietary were net sellers for $543 million.
    apurv.gupta@timesgroup.com