The fortunes of the Indian market maybe driven by FII inflows, but do foreign investors make the same mistake as most retail investors i.e. buying high and selling low? Here is the evidence over the last five years. The first of a three-part series shows how FIIs investment crests near market peaks
The Sensex had hit 20,203 on 31st January this year, a 59-month high, and a shade lower than all-time high made in January 2008. This followed six months of relentless rally, on the hopes that the Indian economy will record stronger growth and corporate performance will duly improve especially since the new finance minister, P Chidambaram—the darling of the equity markets—took the reins in September and announced a flurry of “economic reforms”.
The rally was, of course, caused by a flood of money from the source which mattered—foreign institutional investors (FIIs), a venerated group of amorphous people—from the storied names in Wall Street to the nameless and faceless multitude behind the post box addresses in Mauritius. The rally was set to continue well into the future. Many, including some very smart people working in the best of broking houses, suggested that the Sensex would hit 23,000 and higher.
That month, January 2013, FIIs, the arbiters of value and price of an Indian stock and everything in between, pumped in a stupendous Rs19,198 crore. That figure was the fourth highest in the last 20 years that the FIIs have investing in India. There was only one small problem. In January, the Sensex peaked. The smart investors managing millions of dollars had invested near the market peak? That seems strange. Would you call it an exceptional situation? Are we suffering from hindsight bias—of acting knowledgeable after the event? Not really.
Panic buying near market peaks
Well, here is the thing. The FIIs, smart guys, act exactly like you and me, retail investors. They suffer from the same syndrome as we do after watching massive rallies unfold—the sense that the train is leaving the station, and that we have to get in anyhow. They have the knack for rushing in with huge buy orders well after a massive rally; they invest within 5% of the market peak. Time after time. Don’t believe it? Well, how about looking at the other instances FII investments that were more than January 2013? Were such large infusions followed by a rising, stagnant or a declining market?
These were hardly the times to be wildly bullish. The FIIs invested over Rs36,800 crore—the highest two-month investment ever—in September 2010 and October 2010. Two and half years after that the Sensex is actually down!
That outstanding example of FIIs investing at peak prices is rivalled by the case of February 2012, a month when for no obvious reason, Rs23,236 crore of investment came intoIndia, the highest ever!
Exactly timed with that, the Sensex peaked at over 18,500. By mid-May that year, barely three months later, the Sensex had crashed to about 15,800.
Over September and October 2010, the largest two month burst of investment took place and the market underperformed thereafter. The second-largest two-month investment? That happened in December 2012 and January 2013.
A massive FII inflow of nearly Rs33,000 crore had come in when the Sensex was well-above the 19,000 mark during these two months. Almost six months later, Sensex return is near zero. We do not know whether the Sensex will regain its January peak and keep rising. What we know for sure that for the third time in three years, the maximum investment came in after the market had run up sharply from the lows. Time is running out for this peak investment to earn smart returns.
In the second part of the article we will look at how FIIs, like retail investors chase market rallies and while the third part will examine the behaviour of FIIs in the exact opposite situation described in this article, namely panic selling at market lows.