Mark to Market | FIIs: the smarter lot in current rally

Mark to Market | FIIs: the smarter lot in current rally

It’s a well-known fact that large foreign institutional flows have been among the main reasons for the huge rally in Indian equities since early 2003.

A Mint study of corporate India’s shareholding pattern reveals that they’re also the biggest beneficiaries of the rally. Foreign institutional investor (FII) assets have grown by about 14.5 times toRs8 trillion between March 2003 and September 2007, data collected from Capitaline Databases shows.

During the same period, free-float market capitalization rose by 9.8 times to Rs22.5 trillion. From only a 20.6% share of India’s free-float market capitalization in early 2003, FIIs now enjoy a 34.7% share.

Meanwhile, each of the other major investor groups has seen a decline in their share of the market. Retail investors held a higher 28.7% stake in free-float market capitalization in March 2003—it’s now fallen to 21.5%. Domestic institutional investors, including mutual funds, insurance companies and banks, have also seen their share fall, from 23.5% in 2003 to 19.7% currently.

In fact, the share of domestic institutional investors had fallen to as low as 16.6% by March 2005, primarily because of the lag effect with which mutual fund and insurance investors step into the equity market. In fiscal 2004 and fiscal 2005, the first two years of the rally, mutual funds were net equity buyers worth just Rs73 crore per month. Since then, purchases have been stepped up to nearly Rs1,000 crore per month. Similar data isn’t available for insurance companies and other domestic institutions, but their shareholding data suggests they stepped up equity purchases only since fiscal 2007. FIIs have been aggressive buyers right from early 2003, stepping up purchases in later years to keep up with increased share prices and the rise in listed market cap. As a result, the average acquisition cost of the FII club turns out to be much lower, compared with domestic investors, who have missed out much of the initial two-three years of the rally.

The data also shows that Indian promoters have seen their share of total market capitalization increase from 42.9% in 2003 to 48.7% currently. But before jumping to conclusions about them being market savvy, it must be noted that a number of large listings since 2003 have been from corporates where promoter stake is rather high. For example, new listings such as NTPC Ltd, DLF Ltd, Tata Consultancy Services Ltd, and Reliance Petroleum Ltd had a combined market cap of Rs4.6 trillion in end-September—Indian owners of these companies own nearly 85% of this. The share of foreign promoters has fallen from 8.2% to 7.1% as delistings and share price underperformance offset acquisitions made by foreign companies in India.

What did FIIs buy in the September quarter? What sectors did the mutual funds favour? What did insurance companies buy?

The answers to these questions can be found in a Citigroup Inc. analysis of the changes in corporate ownership in India in the last quarter, titled Owning India Inc. written by Ratnesh Kumar and Tirthankar Patnaik.

Interestingly, insurance companies appear to have a very different strategy compared with the other players. Their biggest overweight sector, compared with the Nifty, is consumer staples (these account for 10.13% of the insurance companies’ portfolio, compared with their 4.26% weight in the Nifty—a difference of 587 basis points (bps)—followed by consumer discretionary (a difference of 421 bps).

Industrials, which have done most of the running in recent months, are overweight just by 92 bps.

Contrast the strategy of mutual funds, which are overweight by a huge 1,898 bps in industrials (29.7% of their portfolio is in industrials, compared with a weight of 10.7% in the Nifty). However, mutual funds too are overweight—consumer discretionary (by 426 bps) and consumer staples (289 bps).

FIIs, which are benchmarked with the Morgan Stanley Capital International (MSCI) India index rather than the Nifty, have their biggest overweight position in industrials (408 bps) and they are significantly underweight in consumer staples.

Energy and information technology (IT) are some of the biggest underweights for all investor classes. However, during the September quarter, insurance companies significantly reduced their underweights in IT, energy and telecom, while reducing their overweights in utilities, consumer staples and consumer discretionary.

Mutual funds reduced their underweights in telecom and energy, but increased it in IT. They reduced overweights in consumer staples and discretionary but increased dramatically their overweight position in industrials, from 1,400 bps to 1,898 bps.

FIIs too increased further their underweight positions in IT, while increasing overweight positions in industrials. Even the insurance companies increased their position in industrials from an underweight of 38 bps at the end of the June quarter, to an overweight of 92 bps by end-September.

The difference in the more long-term perspective of insurance companies also comes across from the stocks they bought heavily in the last quarter. These companies include Maruti Suzuki India Ltd, Raymond Group, Tata Motors Ltd, and Ranbaxy Laboratories Ltd—none of which are the market’s hot favourites at the moment.

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