Stocks
Experts peddle myths and misconceptions to downplay fears of FIIs pulling out

Ask a question about how much the Indian market is dependent on FII investment and fund managers will flood you with myths and wishful thinking

Indian markets almost hit their all-time high in October, primarily led by the copious inflows from foreign institutional investors (FIIs). FII investment has already crossed $21 billion in 2010. However, this begs the question, if we are so dependent on the kindness of foreigners for our bull market, what happens when they start selling? To discuss this, Indian Merchants' Chamber of Commerce recently organised a discussion, in which Sanjay Sinha, CEO, L&T Mutual Fund, participated.

Commenting on this phenomenal rise in stock markets, Mr Sinha said, "The ongoing interest in equities is shown by strong inflow in the general emerging markets (GEM) which has been more than $40 billion, rising equity weights in GEM pension fund assets, heavy IPO activity and secondary issuance."

But aren't these factors clear signals of an overheated market? The flurry of IPOs, for instance, is a telltale sign of a market that has reached a kind of euphoria. Mr Sinha cited the example of the Korean stock market, which continued its upward surge despite FIIs pulling out funds from the market.

"Despite outflow of funds by FIIs from the Kospi Index, the Korean stock market was surging due to high participation from retail, mutual fund, insurance schemes and pension funds. So even if FIIs withdraw their funds from the Indian stock market, it should not plunge and retailers should show massive interest in the surging economic market."

Mr Sinha's facts may be correct but are quite irrelevant. Indeed, the facts in India are exactly the opposite. Where are the retail investors, mutual funds, insurance companies and pension funds in India? Here are some facts that Mr Sinha knows better than us but prefers to put out a different point of view to the public. Thanks to a slew of regulatory changes in the financial services industry, the number of retail investors is dwindling rapidly. Mutual funds have witnessed a massive hemorrhage of funds ever since the Securities and Exchange Board of India (SEBI) abolished the entry load in August last year.

September 2010 saw equity fund outflows touching a level as high as Rs7,100 crore, taking the outflow to Rs21,000 crore over the last 14 months. Similarly, revised Unit-linked Insurance Plan (ULIP) regulations have hurt the life insurance industry, whose ULIP sales accounted for 80% of the total. Pension funds do not even participate in the Indian equity markets in any meaningful manner. The Indian situation is exactly the opposite of that in Korea.

Mr Sinha had another piece of logic as to why the market will not fall with FII selling that completely contradicted the facts. He said that FIIs are unlikely to sell since it would erode the value of their investments! If that was true, markets would fall because all equity markets in the world are substantially dominated by institutions. The fact is, and Mr Sinha knows it very well, institutions move in herds. They buy in herds and sell in herds because of two reasons. One, institutional investors do not work in isolation. They are keen to know what their peers are buying and selling and even try to follow each other. FIIs are more interested in the short-term actions of their fellow investors than the long-term returns of their holding. Those who have increased their investment heavily recently are especially nervous of a decline. A temporary but large looming global or local crisis can send stocks skidding. Didn't the Sensex drop by 5,000 points in the April-May period on FIIs worrying about what is happening in Greece of all places? Two, when the market declines quite a bit, investors tend to withdraw their money and a serial redemption will force FIIs to sell together even if they don't want to. In that case, they have no choice. Mr Sinha surely knows such a thing as selling caused by redemption pressure.

If Mr Sinha, an ace fund manager, peddled lots of misconceptions and myths about the institutional investors, another top fund manager, Sunil Singhania of Reliance Mutual fund, was not far behind. He argued that India is expected to be the third largest economy in the world. He feels that BRIC countries will double in size in 5-10 years from $8 trillion economy to $16 trillion while by that time the US economy will struggle. Hence he firmly believes that money will shift from developed economies to emerging ones. Even if you don't dispute these figures, beware of drawing any market-linked conclusions from it. It is classical fallacy to assume that economic growth and stock market movement are anything but loosely correlated. Ask yourself why does the fastest growing economy in the world not have the fastest-rising stock market? Shanghai is not among the best performing markets of the past 20 years.

Argues Mr Sinha, "Global economies especially developed economies like the US and the eurozone are giving mixed signals and pointing towards a prolonged period of benign growth which will keep the central bankers inclined towards maintaining (a) loose monetary policy stance." Well, this is the actual truth. A low interest rate regime in the West and Japan is what is giving an unusual lift to stocks in emerging markets, as also commodities. The bulk of FII money is chasing Indian stocks because of lack of alternatives and not because of the great long-term story of India. Watch out for a change in the interest rate situation in the West; a lot of money would return home and a small bout of selling by FIIs is all that is needed to bring the market down. The same fund managers who are saying FII selling doesn't matter or won't happen may be the first ones to sell.
 

User

COMMENTS

Vikram M

6 years ago

The author of this article has not seen mathematical analyses that prove that there is negligible connection between FII money and sensex.

G R Chari

6 years ago

A good expose on the mistaken notions of senior fund managers. No wonder most of the MF schemes are underperforming the market. The emerging markets have been hijacked by fickle-minded foreign fund managers looking for short term gains.

RNandakumar

6 years ago

Thank you for a very frank and consumer oriented article. Wise people learn form others mistakes. fools from their own. You have done your duty of creating an awarness. Now it is left to the investor.

Jayesh Pattani

6 years ago

Mr Sinha and Mr Singhania You both are most famous ans respectable name in Industry, But, if your management permit and your marketing persons agree to grow your funds steadily and staying at growth advice them to plan marketing activity with a view of IFAs not corporate distributors and bank distributors, because only IFAs is first face of any Institutions to investor if they will become powerful with knowledge they will help to break redemptions pressure to you, empower your "FIRST FACES" with depth knowledge not with TRIPS

Rambabu Shastri

6 years ago

Inflation will bring this Govt down mid of next year. The next wave of quantitative easing by the US will impact commodities world wide. All that money will flow there, creating massive problems for Emerging Economies. I sometimes feel that Quantitative Easing is being used as a weapon to tame China, but is affecting countries who are not curbing these capital flows.

Ripon Malhotra

6 years ago

I fully agree with the authors that India and Korea are different and cannot be compared.

I also pity speakers like Mr. Sanjay Sinha, CEO, L&T Mutual Fund, and Mr. Sunil Singhania of Reliance Mutual fund, who in order to save their jobs and earn bonuses, try fooling the gullible Retail / small investors to invest even in such conditions, while they themselves are the first one to sell even at the sight of a Mirage of FII selling.

The India consumption story, GDP and so on is nothing but an illusion, without FII participation. The rise in market / current rally is on the strength of borrowed legs of FII’s and shall collapse like house of cards on their selling.

The Retail investors have already lost heavily, in the last melt down and shall do a favour to themselves, by not listening to these so-called experts. Better sell and, take home some profit today, and not be greedy to lose when the music stops, by the time when these experts would have already sold their investments.

Ripon Malhotra
FCA., LL.B.
[email protected]

REPLY

RNandakumar

In Reply to Ripon Malhotra 6 years ago

Your words are quite prophetic. Now after three months I am able to see the analyts in TV declaring that FII are nopw leaving Asia to develped markets to seek greener pastures. Central Govt's administrative abilities could be another factor of the present market behaviour. I pray for the failure of this Govt througha cut motion in the budget session.

ROOPSINGH

In Reply to Ripon Malhotra 6 years ago

I fuly agree to your conclusion-The Fund managers have always 2 faces-their front face always speaks about bullishness because then only people will come to invest and earn their AMC expanses-none of fund manager has never warned investors to book profits in worst scenario-never in history-so this ROSY picture is not new-

Bimal R Bhatt

6 years ago

What is the objective of capitalisation? Earnings only. So simply demand -supply principle will apply and see the Indian stock markets-down only. Also where is the real education for retail investor?

Rajesh

6 years ago

Well written.
Yes, where are the retailers?
Are they caught in some other bubble of real estate ?

Dheeraj Hinduja takes over as chairman of Ashok Leyland

Dheeraj Hinduja, the second of the four brothers who have built the Hinduja Group, would now led Ashok Leyland while incumbent RJ Shahaney would become its chairman emiratus.

Hinduja Group company Ashok Leyland said it appointed Dheeraj Hinduja as its chairman.  He takes over from RJ Shahaney, who will now be chairman emeritus.
Mr Hinduja, who has been co-chairman of the company for the past three years, is a third-generation member of the Hinduja family. He has years of experience at strategic and leadership levels covering a wide variety of businesses across diverse sectors such as automotives, energy, infrastructure, finance and banking, IT and ITes, media and healthcare.

"I have very ambitious expansion plans for Ashok Leyland and right at the top of my priority list is to fast-track the company's global thrust through both organic and inorganic modes," said Mr Hinduja.  

Mr Hinduja succeeds Mr Shahaney who was earlier Ashok Leyland's first Indian managing director. Mr Shahaney, who joined Ashok Leyland in 1978, was primarily responsible in spreading the Company's manufacturing footprint in India with the establishment of facilities at Hosur, Bhandara and Alwar.

Mr Shahaney said, "Today's challenges are very different in nature but they are just as exacting and formidable as they were before. I have participated in Ashok Leyland's growth to the stature and size it now has acquired; all the engines of growth are in place and it is now for Dheeraj and his team to lead the Company to even greater heights in the coming years. I shall always follow its fortunes with passion because Ashok Leyland is very much a part of me."
 

User

Finally, Mumbai builders are unable to hold up prices and are offering steep discounts

After keeping prices artificially high over the past several months, Mumbai-based builders have now turned desperate to sell flats and are offering steep discounts

Pressure is building up on builders. Usually at this time of the year, builders are ready with various schemes to sell high-priced apartments in Mumbai to take advantage of the surge in spending during the festive season.

However, this year, flats are not selling. Though builders in Mumbai have tried to keep prices artificially high for all these months, they have now buckled under and have come up with lucrative schemes to push sales in the residential segment. Among their tactics is making a '10:90' offer.

Under this scheme, a buyer has to pay only 10% of a flat's cost and the rest after possession. Builders offering this scheme are ready to bear the interest burden right up to the time they are able to hand over possession of property.

Builders are taking the hit of interest during construction - which is a kind of hidden discount to the customer. This is very different from the situation when customers used to wait endlessly for a project to be completed and bear the interest cost of the loan they have taken. In those situations, builders even colluded with bank officials to get them to certify that the project had progressed much more than it really had, to get the customers to cough up more money.

The current '10:90' scheme is available for affluent buyers whose budget is between Rs2 crore to Rs5 crore. Indiabulls introduced the '10:90' scheme for a project located in central Mumbai. For this scheme, it has tied up with HDFC and ICICI Bank to provide loans to customers.

Mumbai builders have had extremely ambitious plans to build scores of towers in the central region of the metropolis. These towers were supposed to have luxurious apartments, commanding fancy prices. However, they were clearly unaffordable even for the rich.

To push sales, some builders are also offering cars to property brokers in addition to their brokerage if they meet given targets.

In another option, builders are offering highly discounted rates to those who come up with cash upfront. In one case, a posh apartment in central Mumbai is available for Rs16,000 per square foot for full cash-down payment - when the going rate is Rs40,000.

Even though the '10:90' scheme is attractive, "it is getting a mixed response so far as the offer is only for high-cost apartments," a real estate expert told Moneylife, preferring anonymity.

"Even though such schemes look great, buyers should take precaution as they are being offered for under-construction projects. The completion risks of these projects remain and one must check the builders' track record and financial strength before jumping in," added the expert.

Moneylife has been pointing out that high property values and interest rates, coupled with a lower loan- to-value ratio, are becoming serious obstacles for average homebuyers.

A survey conducted by ICICI Securities recently found that property prices have become unaffordable. According to the survey in which 3,839 ICICI Direct customers participated, 72% of the respondents believed that property prices were unaffordable and 79% perceived property prices to be high. However, a significant section of the respondents indicated that while affordability was a concern, it was manageable.

The survey showed that 48% of the buyers were interested in buying at current prices or were keen to see a marginal correction. The survey was conducted during June-July this year. The survey also found that a larger percentage of respondents in Mumbai and Pune felt that home prices were too high, compared to Hyderabad and Kolkata.

User

COMMENTS

MAK

6 years ago

NOW ADHARSH GHOTALA HAS COME TO LIGHT.......NEXT WILL BE ...JUST GUESS...........THERE CAN BE SO MANY THAUSANDS.....GHOTALAS WILL COME TO LIGHT..........

Ashu

6 years ago

It is duty of Govt./regulator to intervene whenever the prices goes up unfordable for essential commodities/assets . here Govt. it self cooluding with big sharks to keep the prices high as these are helpful to keep parties funds high. Cost of the flats are notional which can be anything. The steep rise in real estate are in good for builders,investors, corrupt officials,politicians etc. Only needy persons i.e. end users are supposed to suffer.

P C Chacko

6 years ago

The present real estate prices in all metro cities are unaffordable,ingflated unreasonable and higly profiteering by the big builders land sharks and crooked developers. The prices are 50% more thn the reasonable prices.The profit matrgin taken by builders are huge When flat or house prices increases the land prices also increase and it is a viscous cycle.There is no government control on builders and developers The area they mention is highly inflated It should be made mandatory to show the crpet area,builtup area and the super built up area Prices should be mentioned as per carpet area this will avoid the lloting made by the builder by mentioning inflated area.

REPLY

ravindra

In Reply to P C Chacko 6 years ago


Presently Builders are selling houses in 40~48% less than saleable area(carpet area).What it makes different whether he sale on carpet or super built up.If you want to buy on carpet area the prices of same house will go up 40~48% than offer value.The value of prices pushed artificially high.As told by one builder,we will increase the price to Rs100 every 10 days.There are two benefits,mainly
1)Customer are under stress or get panic.Those who need booked urgently.
2)The customer who booked house already also happy that there investment is growing up.

vivek

6 years ago

MCHI only mocking their rule as in exhibition they are selling flats on super built up area. Politics and black money causing prices to go up n up. Swiss bank money also cmg in real estate, we shud all lodge complain on rbi official site.

mak

6 years ago

THE PROPERTY PRICES MAY CRASH SOON IMMEDIATELY AFTER DIWALI TO 50% OR MORE

REPLY

Prakash

In Reply to mak 6 years ago

I think you are living in a world of your own hoping/predicting realty prices to drop by 50% or more.

ravindra

In Reply to mak 6 years ago

I totally accepts with your views.It is beyond reach of middle class man.

mak

In Reply to ravindra 6 years ago

Thankx Ravindra.
A Crash of both stock prices and Real Estate Prices are expected any time! Just like in USA some years back there was payment crisis of housing sectors, even Big Finance houses and Banks have gone into red!
Some people say its like Newton's Law of Gravitational forces: all that goes up must come down!
People say it all depends on various factors.....
Will it ALLOW to continue to mashroom hutments and enroachements like in MUMBAI CITY and suburbs ........Like what will be the policy of government about Free Housing to Illegal hutments and enchroachers.......

MAK

In Reply to mak 6 years ago

People say SRA SCHEMES are not actually benefting the Urban poor's housing problems..... as 90% all of them sell the flats or rent out and again. now again encouraged to make new hutments else where. So another builder will approach them and provide them another SRA'S housing and it goes on.
People say SRA SCHEMES are leading to big influx of Rural populations to URBAN cities like Mumbai, where govt. is providing FREE housing to Poors.
CAN ANY BODY TELL WHAT ARE THE SITUATION IN OTHER METROS LIKE DELHI, KOLKATTA, CHENNAI, and smaller cities and towns. Are AUTHORITIES are taking any actions to such illegal structures?

MAK

In Reply to mak 6 years ago

Well People say now the Authorities will have to take actions just like they have demolished illegal enchroachments at Girgaum Chowpaty.....As now rainy season is over and they have sufficient Manpower and Machinery to take actions and demolish encrochments in various locations in Mumbai city and more particulary near Railway Stations, Bus Stations and prime properties.

Rambabu Shastri

6 years ago

No one knows. If the next FII wave pushes money into real estate companies, then the market will still hold up. The bottomline is that India is slowly becoming unaffordable for ordinary Indians. The government will fall by mid next year if they are unable to control inflation as a result of the Quantitative Easing the US is doing. I expect commodities to be the next big thing for FIIs

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)