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FIIs usually put in their highest investments near the market peaks and are usually found to be chasing both market rallies. Do they at least steel their nerves and buy during market declines? Not quite. Here is some evidence over the last five years
On 9th April, the Sensex hit 18,206.61 during the trading day. The index had been falling all the way from 20,203 it hit on 29th January. Remember during January, FIIs (foreign institutional investors) had put in an investment of Rs19,198 crore, the third-highest ever. But instead of heading higher from that point onwards, the market had been declining. FIIs continued to buy during March, even after an insipid Union Budget. Finally in April, after the market had fallen more than 1,500 points, FIIs turned reluctant sellers. On 9th April, the index fell sharply in one last swoon.
FIIs sold Rs664.90 crore worth of stocks that day, one of the highest net sales during the year. The Sensex dipped a shade below 18,200 the next day and shot up higher, in a straight line, recovering 2,000 points in the blink of an eye. The FIIs had done it again—pressed sales at the market low. April, when the market made its recent low, also witnessed the lowest FII net monthly inflows of the year.
We know that retail investors usually lose their nerve and turn into panic sellers when stock markets suffer sharp declines. Stock experts will tell you that that is exactly when you should be brave enough to buy. Maybe FIIs, the experts with nerves of steel, practice that? Well, not quite. Just as they chase rallies and put in the maximum investment near the market peaks, FIIs also press sales when the market is headed sharply lower. The above is just one such example.
To be fair, often a fund can be a reluctant and forced seller due to redemption requests when the market is crashing. But often this is not the cause behind mass scale selling by FIIs. Hedge funds have clauses to prevent irrational withdrawals (called ‘gating’) by investors can that can affect fund performance. It might surprise you to know that there is usually a complete correlation between significant FIIs net sales and market bottoms, again and again.
Take the extreme case of September and October 2008, when global markets fell off the cliff. As the chart depicts, net sales by FIIs started July 2008, picked up a bit in August and turned into an avalanche in September and October 2008. The major market bottom? October 2008, as the Sensex hit 7,697 intraday on 29th October. FIIs continued to bet net sellers virtually every month right up to March 2009 when from the first week of that month, a global rally was underway.
In January 2010, as the euphoria of the Congress-led victory on 2009 elections started to wear off, the Sensex dipped below 16,000, making a low of 15,652 in early February. Not surprisingly, the FIIs were selling. Their net sales were a significant Rs7216.67 crore in January. Interestingly, their maximum net sales (like in April 2013), coming within days of the exact market short-term bottom. It was exactly the same story in May 2010, as the index, after a temporary rally to 18,000+, started swooning impacted by poor economic growth. On 25th May the Sensex made a bottom of 15,960 and then rose to almost 18,000 within a month. And what did FIIs do in May? Pressed net sales of Rs12,071 crore, the third highest ever and almost as big as their net sales in September 2008, when the global markets were imploding.
The net sales of May 2010 were of course immediately followed by momentum-chasing (as described in the last piece). As the markets took off, FIIs scrambled back to investing Rs7,500-Rs8,500 crore per month for the next three months. It bears repetition, that this was just the appetiser. The FIIs rushed in with over Rs36,800 crore of net buying in September and October 2010, exactly timed with the significant market top of 21,108 on 5 November 2010, one that has not been surpassed till today!
Finally, witness the FII investment behaviour in the second half of 2011, when another important market bottom was made. In August 2011, the euphoria of the late 2010 had worn off. Buying on the hope that quantitative easing by the US Federal Reserve would push up all asset prices was replaced by the reality of flagging corporate performance and interest rate increases in India, combined with the problem of Eurozone. The Sensex hit 15,765 on 26th August. Were FIIs significant buyers? No. Their net sales that month was over Rs11,500 crore. They continued to sell into December, as the Sensex hit 15,136. The moment the market rallied next month, momentum-chasing was in order with a climactic net buying of Rs23,236 crore happening in February 2012, the highest ever, as the Sensex hit a peak of 18,524 and headed lower. FIIs had again done their act of sell low, buy high.
For almost two decades now, FIIs, treated like sons-in-law in an Indian home, have driven the Indian market higher so much so that their holdings of all blue-chip companies far exceeds the combined Indian holdings and are only a step behind the controlling group’s holding. In some cases like HDFC and HDFC Bank, they are, by far, the largest shareholder group. The laws that govern them are shady and remained so, under successive finance ministers—from the righteous Yashwant Sinha to Jaswant Singh to the stalwart of licence-control regime Pranab Mukherjee to command-and-control master P Chidambaram. FIIs are to be left alone. They can come and go, reveal nothing and pay no taxes—we need their money. We hardly know who these people are. Even when the market regulator was investing in the 2001 scam, foreign brokers refused to reveal the names of beneficiary FIIs. The powerful SEBI chairmen could do nothing.
But fret not. No matter who they are, they are not smart enough to follow what some cool-headed individual, amateur investors are able to—buy good stocks when they are down and sell them when you need the money or when the market goes mad. FIIs do the opposite. Buying near the peak, chasing a rally to panic selling at the market lows, they act exactly as the average retail investor, the world over. As an investor, follow the FII data closely and take the other side when you see extremes. You may do better than them!