Mumbai: Shareholding of foreign institutional investors (FIIs) in domestic companies has scaled at least a six-year high because there has been a flight of funds to emerging markets such as India.
With central banks in Europe and the US keeping interest rates low, overseas funds have flowed to markets such as India, Brazil and China.
“Given the continued easy liquidity environment, global investors are on the lookout for fundamental investment opportunities that can play out in the next decade or so, and India certainly qualifies for the same,” said Sivasubramanian K.N., chief investment officer, Franklin Equity-India, Franklin Templeton Investments. “India’s strong growth profile and the relatively large dependence on domestic demand are key factors that have driven FII interest in India.”
Further, while companies across the world struggle to stay afloat amid a global economic crisis, Indian firms continue to report robust earnings, helped by higher margins, which, too, has boosted investor appetite for Indian shares.
Besides, Indian companies enjoy relatively high return on equity levels and “exhibit low earnings cyclicality, compared with other markets”, Sivasubramanian said.
The average FII shareholding in 322 companies in the BSE-500 index—the set of stocks that account for 93% of the exchange’s market capitalization—was 14.22% for the quarter ended December, the highest in six years.
At the end of calendar year 2006, FIIs held 12.83% in the same set of companies, before the shareholding dropped to 10.35% in the March 2009 quarter as the global financial crisis worsened. “India inflows amounted to US$894 million in December; listed funds saw inflows worth US$2.8 billion in CY2012 (calendar year 2012). BRIC funds prefer India and China over Brazil considering its rich valuations,” Kotak Institutional Equities said in a recent report.
In 2012, FIIs pumped in a net $24.55 billion into Indian shares, the second highest in any year after these investors were allowed entry in 1993, according to Securities and Exchange Board of India data.
“We’ve talked about a global policy environment conducive to risk assets, suggesting continued flows into Indian equities. But what about India-specific flows? For India didn’t just receive its fair share of global assets, it was the highest recipient of flows in Asia,” Espirito Santo Securities said in a report.
Inflows continue unabated into the new year as well, with January recording FII net investments worth $3.01 billion so far, the highest in two decades. Experts say the trend will continue.
“We believe that India will continue to attract flows over the medium- to long-term, notwithstanding short-term reversals due to changes in global risk appetite.
At the same time, the low domestic retail investor interest in equities has weighed on DII (domestic institutional investors) flows into markets,” said Sivasubramanian of Franklin Templeton.
Domestic institutional investors’ shareholding in the 322 BSE-500 companies was at 8.23%, the lowest in six years, while their shareholding in 46 of the 50 firms of the Nifty—the benchmark index on the National Stock Exchange—was 11.82%, the lowest in 10 quarters.
DII shareholding in 28 of the 30 companies comprising the Sensex, India’s most followed equities gauge, was at 12.10%, again the lowest in 10 quarters, as retail investors, who suffered in the meltdown of 2008, remained sceptical of the recent equities rally.
A record Rs.19,261.50 crore came in September following the appointment of P. Chidambaram a month earlier as finance minister and as the government started pushing forward policy reforms.
FII shareholding in 46 Nifty companies was at 19.05% for the December quarter, the highest since December 2006 when they held 16.46% in Nifty companies.
The trend was similar in the 28 Sensex companies, with FIIs holding 17.60% stake against the 14.55% they held in December 2006.
With foreign money flowing in at this rate, the Nifty gained 27.7% and the Sensex 25.7% in 2012.
In January so far, the Nifty has risen 2.87% to 6,074.65 points, and the Sensex 3.48% to 20,103.53 points. But since the rally has been quick and sharp on the back of higher inflows, experts expect some pull-back before the trend resumes.
“We believe the Indian market is critically poised after the recent outperformance, which was driven by an improvement in global risk appetite and optimism surrounding a slew of structural reforms,” BNP Paribas Securities Asia said in a research report.
“With the parliamentary approval for FDI (foreign direct investment) in multi-brand retail and a 10-23% hike in rail passenger fares, the government is laying grounds for politically unpopular but necessary decisions—subsidy rationalization,” it added. “Even so, we think much of the good news is priced into the market with Sensex 12-month forward P/E trading at 14.7x.”
While there has been a dramatic turnaround in investor sentiment towards India since the latter half of last year, from now on much will depend on the government continuing its policy reforms, say analysts.
“Starting 2013 and India is no longer a big underweight in portfolios, so India-specific flows will depend more this year on continued momentum in public policy,” Espirito Santo said in its report.
On a sectoral basis, FIIs increased their stake to 22.41% in nine automobile companies for which data is available—their highest in six years. But in five real estate companies that are a part of the BSE realty index, FIIs trimmed their stake to 28.05% between October and December, the lowest in four quarters.
Many other sectors, too, benefited, with FII shareholdings rising to six-year highs in banks (24.75% in 14 stocks), healthcare companies (21.50% in 16), fast-moving consumer goods companies (19.82% in nine), and consumer durable firms (12.61% in eight).
In 43 public sector companies, FII shareholding rose to 5.63%—the highest in 17 quarters.