FIIs poured as much as $8.4 billion into Indian equities in the third quarter and much of it into banking and financial sectors

Foreign Institutional Investors (FIIs) have been pumping money into the Indian stock market as if there is no tomorrow. According to Edelweiss, FII holdings in the BSE100 companies is estimated now at 19.7%, an all-time high after they poured in as much as $8.4 billion in the third quarter of the current fiscal (compared to $8.1 billion in the previous quarter). In fact, in the current quarter, FIIs have estimated to have already invested $7.1 billion, which is near the last quarter amount. Some of the top stocks held by FIIs are HDFC, NMDC, HDFC Bank while they sold Cairn India, DLF and United Phosphorus. FIIs are also bullish on the financial sector.
 

“We have extended the exercise to gauge which stocks have attracted highest buying or selling by FIIs. Banks remain a clear preference for FII buying. Four out of the top five FII buys are banks. Government divestment in NMDC also attracted good traction resulting in $472 million inflows into the stock. Cairn India was the top FII sell. The Robert Vadra scam resulted in FIIs selling $67 million from DLF,” the report said.

The BFSI segment which comprises of financial institutions and banks was lapped up the most by FIIs. As much as 41% of all the money invested in the third quarter went to this sector. As mentioned above, the top four out of five picks were financial institutions. Edelweiss said, “We do not have SEBI data for FII flows into various sectors for Q3FY13, but our estimates indicate that majority of FII flows were garnered by the banking sector, in continuation of the Q2FY13 trend.

Several reasons cited by Edelweiss are the theme that has been oft repeated by several other brokers: the government’s reforms push, the Reserve Bank of India (RBI) rate cuts as well as quantitative easing by central banks world over. This resulted in massive influx of so called “easy money” which found its way to India. However, if we compare the cumulative inflows in relative to other emerging economies, the findings are alarming. Is there a bubble brewing? Take a look at the graph below:

One of the more discerning aspects of FII inflows has been, according to Edelweiss, their focus on increasing ‘beta’ in their portfolio. In other words, their portfolio has just got riskier and more volatile, by investing more in BFSI (which is uncertain), autos (which is going through a hard time) and information technology (rupee-dollar uncertainty continues). The report said, “What’s more interesting is the increase in beta of FII portfolios, with utilities and autos gaining traction. As a result, the relative positioning of BFSI, autos, utilities, capital goods and materials increased during the quarter. This was funded by reduction in relative positioning in consumers and IT.” Beta refers to the individual stock movement in relation to the market. The higher beta stocks are more volatile, implying that quick money could be made on short spurts in momentum, and vice versa.
 

Their addition of ‘beta’ to their portfolio meant that they were overweight on banks & financial institutions, information technology and auto, while remaining underweight capital goods, energy and consumer goods. If we look closely, this seems to be more of a directional bet, based on recent actions of the government, than a bet on India’s long-term growth story.
 

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