There has been a strong spike in net FII investment on the 30th of October as these discerning market participants clocked net purchases of Rs. 7,192.42 crore. Interestingly, post the inflow, the stock market, as represented by the Nifty 50, has been buoyant, even breaching the magical 12k figure on occasions.
FII interest in Indian stocks has picked up after five months of negative inflows since May 2019, which finally turned positive in October.
But what has made this financial clutch return to the Indian markets, after relatively subdued net action over the past few months?
The corporate rate tax cuts and a favourable monetary policy have been the most prominent motivators for foreign brokerages to revise and upgrade their ratings for India and expect higher earnings estimates for Indian companies. These two triggers have led to:
1. Improved liquidity in the economy with the RBI constantly slashing its repo rate for the fifth time in a row during the October 4th, 2019 MPC meet;
2. A rise in the earnings estimates of the companies on account of the corporate tax rate cut by the government;
The new wave of FII confidence has also been nudged by international factors such as:
1. Subdued indications on rates and liquidity by global central banks;
2. Lower interest rates in the United States, which make emerging markets like India relatively attractive to foreign investors.
So, what does the flow of FII funds generally suggest for the retail investor?
Net positive FIIs inflows usually usher in optimism amongst domestic investors. Effectively, FII and FPI movements inequities are considered as influencers in the market. If this is true, tracking their movements could give retail investors some investment pointers.
With the ability to choose their investment destinations, inflows into the domestic markets are a quasi ‘vote of confidence’. It is perceived that with their money muscle and copious intellectual resources that are constantly tracking the global markets if they have chosen to bring their funds into the Indian markets, they have seen a long or short-term opportunity.
Accordingly, FII inflow is a good signal for retail investors waiting in the wings to enter the markets.
That leads us to the moot questions: Is following FIIs into and out of the market a sound strategic play? What happens when FIIs pull out of a market? It breaks retail investor confidence in the market and they tent to exit, even prematurely, i.e., before their unique investment rationale dictates that they should.
Many wise investors will vouch that ‘time in the market rather than timing the market’ is a robust strategy. With that logic, serious long-term investment should ideally be based on information beyond FII trends.
But that being said, tracking FII flows can give retail investors strong signals about the direction of a market trend and its intensity and therefore, indicate good value points for entry and exit.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.