Beware! It’s FIIs driven markets

Dangerous days are here again. Yes one means the stock markets are buoyant and are likely to be so for the short-term up and that’s why one would like to wave the red flag.

Human nature is strange and so when the markets are up people rush in to buy thinking that they can make a fast buck, but once they are in the temptation to put off booking profits is great because the greed factor takes over. This has been happening everytime since the Harshad Mehta scam of 1992-93 when the market was pushed up artificially in recent times.

Need to understand

Investors will have to understand why the markets have been going up so they will be vigilant. Between August 29 and today it has gone up over 1,000 points as the FIIs have been pumping in hundreds of dollars. On Friday, September 18, they pumped in $338 million (Rs 1,869.80 crore).
The day before that it was $555.20 million (Rs 2,663.10 crore) and so on. For the month of September till Friday they had bought net $2,080 million or Rs 10,291.40 crore.
This is a huge sum which is setting the indices on fire.

Moral of story

The moral of this happy story is that it is the FIIs who are fuelling the market.
Analysts and others have to give reasons like stable government, market catching up, strong fundamentals, inflation is down, strong global cues, etc. All these factors just create a good sentiment. But the bottom line is that it is FII buying that is taking the markets up. Last year, when they exited the markets after the Leh-man Brothers collapse, the markets collapsed like a pa-ck of cards. The FII outflow continued ferociously till March 2009. The FIIs deci-de the way the market goes.

Indian honey-pot

So how long will this last? It is very difficult to read the minds of the FIIs. India and China are the two growth stories and they are drawn to the markets in these countries where the returns are more than in their home markets. There is no particular rationale behind their buying. It does not matter that the stocks are overvalued and that the PE ratios are high. They have the money which has to be invested and India and China are the best places.

Remember tomorrow
The global picture does not look good in the long term as the leaders of the Western world try to grapple with restoring financial stability into their economies.
Till now, it is the fiscal stimulus packages of over a trillion dollars that is keeping their economies going.
So they are doing a holding operation. Unemployment is still growing and consumer confidence has not returned. Sooner or later the various governments will have to start withdrawing the stimulus.
There is a likelihood of inflation rearing its head and then interest rates will be raised. The governments, particularly in the United States have printed paper money with no underlying backing. Like they say you cannot ‘buy’ out a problem. So the situation is dangerous. In these circumstances the FIIs could once again flee from the emerging markets including India. That is when investors will be crushed if they are not vigilant. The investor must remember tomorrow when they invest today.

Paying premiums

Our friend Saurabh Mukherjea has an interesting theory about the Indian investors. He said if they like a stock they are willing to pay anything for it and that is what pushes up a stock. And because they pay such a high premium for it the returns generated are not commensurate. He has calculated that there was a 10 per cent negative correlation between FY2004 forward P/E and the subsequent price performance.

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