Mumbai: Large-cap stocks are the flavour of the season for foreign institutional investors (FIIs), which have raised such holdings to their highest level in at least six years, even as their interest in small-cap shares waned to its lowest in the same period on liquidity concerns, lack of transparency and corporate governance.
FII holdings in 28 Sensex companies rose 18.4% on 31 March and in 46 Nifty companies by 19.7%—the highest since the end of March 2007. Their holding in BSE-100 climbed 17.6%, also the highest in the same period, while their interest in 275 small-cap stocks shrunk 6.8% in the comparable period, data compiled by Mint shows.
The analysis comprises firms that published their recent shareholding pattern and have comparable data for the last six years. The benchmark 30-share Sensex of BSE and the broader 50-share Nifty of the National Stock Exchange are India’s two most widely followed gauges. FIIs are the prime movers of the local equities market.
“Until now, FII inflows have been towards index and high-quality large-cap stocks, as almost all of the inflows have been from funds with global, emerging markets and Asia mandates,” said Gautam Chhaochharia, executive director, India strategy and midcaps, UBS Securities India Pvt. Ltd. “I would expect the trend to continue, at least until the recovery in India becomes more pronounced.”
The Sensex has declined 0.1% so far this year, after rising 25.7% in 2012. The BSE-100 fell 1.1% in 2013, after rising almost 30% in 2012.
India is grappling with a record current account deficit, sticky inflation, subdued quarterly corporate earnings and political uncertainty. Economic growth in Asia’s third largest economy is estimated to have dropped to 5% in 2012-13, its slowest in about a decade and after recording over 9% growth for three straight years between 2006 and 2008.
FIIs have infused $10.6 billion in Indian equities in 2013 till date, after pumping in $24.5 billion in the previous year.
However, their interest showed a declining trend, as their investment in March nearly halved to $2.1 billion from $4.1 billion each in January and February. Between 1 April and 22 April, FIIs invested $221.7 million.
Inadequate liquidity, fears over corporate governance and extreme volatility has also prompted foreign funds to shun small-cap stocks.
“For FIIs, one of the factors which is getting very important is liquidity,” Vaibhav Sanghavi, director of Ambit Investment Advisors Pvt. Ltd, said in a phone interview. “Also, corporate governance and transparency issues are also important variables. As many small caps do not fulfil all these conditions, the interest in the pack from FIIs has been coming off.”
The BSE small-cap and mid-cap indices have shed 11.2% and 17.9%, respectively, this year. This is in contrast to respective gains of 38.5% and 33% in 2012.
Even inflows from domestic institutional investors in small caps tumbled to nearly 3% of their total holdings, the lowest since March 2007. It had stood at 7.15% in the March 2008 quarter.
FIIs also favoured the BSE-500 realty stocks, holding 27.7% in big realty companies on 31 March, followed by packaged consumer goods and banking stocks at 21.6% and 20.9% holding, respectively.
“India’s long-term consumption story is intact,” said Sanghavi. “Rate-sensitives are preferred, mainly banking, on increasing views that interest rates are not likely to rise more in the near term. These factors make these sectors the favourites.”