Banking stocks top the shopping list of FIIs
R Chandrasekaran
It seems that foreign institutional investors (FIIs) are bullish on Indian stocks if their trend of holdings is any indication. After five years, FIIs holdings witnessed highest percentage of increase in the March quarter. However, they have become choosy and are picking up index-based large caps and more or less shun small cap stocks.
What made them increase their investment in Indian equities? Though there are concerns on fiscal and current account deficit, there is a school of thought among a section of economists that the Indian economy has bottomed out to 5 percent in the fiscal year 2012–13 and an uptick is on the cards. Given the fact that the Reserve Bank of India is likely to cut interest rates and possibly repo rates, there is a likelihood of the growth picking up momentum in the coming quarters.
Despite the slower economic growth, India offers better growth prospects and can outperform the developed nations such as the U.S. and countries in Europe. India’s growth is driven more by domestic than global consumption. Therefore, once interest rates start coming down, the growth is estimated to be faster. Obviously, this is weighing on the FIIs investment in Indian equities.
Banking stocks top the list of FIIs as the financial sector will stand to gain from rate cuts by the central bank. Axis Bank tops the list, where the FIIs have increased their holdings to 40.94 percent in the March quarter, compared to 32.94 percent over the last year.
Of the 30 Sensex components, FIIs have increased their holdings in 28 companies representing a growth of 18.4 percent during the March quarter. Similarly, of the 50 Nifty companies, they have increased their stake in 46 companies suggesting 19.7 percent increase. In the same breath, FIIs holdings in BSSE-100 stocks also jumped 17.6 percent. These are highest after March 2007. However, the sore point is that FIIs interest in 275 small caps has dropped 6.8 percent.
FIIs stake in 18 of the 50 Nifty companies have reached a record high during the first quarter of 2013, whereas their holdings in 7 more companies are nearing record highs. HDFC Bank, Mahindra & Mahindra, Lupin, DLF, Axis Bank and NTPC recorded significant rise of one to six percentage points in FIIs stake.
Similarly, FIIs remain the biggest shareholders in 128 of the CNX 500 companies in non-promoter categories. This accounts for a little over 45 percent of the BSE’s total market capitalization. Their holdings are over 20 percentage points in 103 stocks, while their stake in 121 companies ranged between 10 and 20 percentage points. In 61 companies, their holdings ranged between 5 and 10 percentage points. Interestingly, they have not increased their stake significantly in oil related stocks such as Reliance Industries or Oil & Natural Gas Commission.
FIIs inflow is significant during the current year. Their inflow in January, February and March were $4.05 billion, $4.57 billion and $1.2 billion, respectively. This has slowed to $823 million in April until April 26. In all, FIIs have pumped in close to $11 billion to Indian equities in 2013. This comes on the back of $24.4 billion investments last year, which was lower than the record witnessed two years back.
The slower FIIs investment in March and April is attributed to combination of factors such as political uncertainty with a potential to lead to early elections to Parliament, deteriorating current account deficit and profit booking.
Indian stock market under-performed in 2013, compared to the U.S. equity market. While the S&P 500 advanced a little over 10 percent in the first quarter and up to April 26 in the U.S., India’s Bombay Stock Exchange’s benchmark index suffered a loss of 3.04 percent in the first quarter. However, some value buying in April brought down the loss to approximately 0.3 percent until April 29 for the current year despite lowest FIIs inflow in the current year.
Globally, there is nothing significant to affect the sentiments. The markets have also taken into account whatever the impact, be it unfavorable or favorable, due to the European crisis or the U.S. budget cuts. Therefore, Indian stocks could rebound if the central bank reduces interest rates to stimulate growth. Reduction in interest rates will likely invite more buyers for home, automobiles, and some consumer goods. Obviously, FIIs wanted stay ahead to pick up the selective stocks before likely significant uptick in the coming months.