From the market bottom of 15,183 in mid-June 2022, the benchmark market NIFTY has soared 69% to hit 25,791. In the last 18 months alone, NIFTY has surged 52%. All investor segments—individual investors, mutual funds and other domestic institutional investors (DIIs)—seem to have made good money from this bull market, except of course, reckless derivatives traders. This lot has lost Rs51,689 crore in FY23-24, according to a study by the Securities and Exchange Board of India (SEBI), the market regulator. What about foreign institutional investors (FIIs)? Surely, with their superior knowledge, long years of experience, access to deep research and large funds, they should have reaped the largest benefit from this bull market?
Here are some shocking overall numbers about their investment. Between June 2022 and 20 September 2024, FIIs were massive net sellers during a big bull market!
Yes, you read that right. They recorded net sales of Rs1.82 lakh core, the biggest monthly sales coming in June 2022, exactly at the bottom of the short, depressed period between November 2021 and June 2022.
Even at those low valuations, panic sales by FIIs of over Rs58,000 crore in June 2022 remain unsurpassed. Indian (and global) markets were under pressure from late-2021 due to high valuation, sharp rise in US inflation, weak post-COVID recovery in China and the Russian invasion of Ukraine.
Who did the FIIs sell to in the dark days of June 2022? To DIIs, who were huge buyers of almost Rs47,000 crore that month, at what turned out to be the market bottom.
This trend was repeated with boring regularity. Take, for instance, January 2023 when the Hindenburg revelations about Adani shook the market. The mini-crash was an opportunity for DIIs to buy (over Rs33,000 crore) while panicky FIIs sold shares worth over Rs41,000 crore.
Of course, even savvy investors sometimes get it wrong. But FIIs collectively took surprisingly poor calls at almost all major market turns. While they did invest strongly between May and July 2023, the earliest stage of the ongoing bull market, they quickly turned bearish over the next three months, pressing net sales of Rs76,000 crore which were lapped up by DIIs (net purchases over Rs70,000 crore). And so, when the market took off in mid-November 2023, it was DIIs who gained handsomely, with FIIs looking rather foolish.
Undeterred by the experience, FIIs remained net sellers every month between January and May 2024, barring March when they had a timid net purchase of only Rs3,300 crore. In the pre-election months, they sold over Rs1.26 lakh crore, while DIIs made net purchases of over Rs2 lakh crore.
That call went wrong again for FIIs; the market fell on the day the general election results were announced and continued to march higher.
Surprisingly, even in the past four months, after the election, FIIs only made a small amount of net purchases and pressed over Rs20,000 crore of net sales figures in August. However, they have been net buyers so far in September.
While these figures may be influenced in a small way by large bulk deals, where one side of the transaction is not an FII or DII, the trend is unmistakable. Over the past 29 months of a strong bull market, DIIs were net buyers of over Rs5.91 lakh crore and FIIs were net sellers of over Rs1.82 lakh crore.
How times change! At one time, the dominance of FIIs in the Indian market was so complete that the late R Ravimohan, then managing director of CRISIL, had said, “The reverence for FIIs has now metamorphosed into the mixed feelings of fear and awe.”
What is surprising though is not that the FIIs got it wrong. Professional investors do get it wrong often. Their image of being cool, competent professionals, who remain calm during market euphoria and wait to buy at a fair value after deep research and exhaustive diligence is often false. But their mistakes are almost always acts of commission, not usually omission.
In a strong bull market, they chase the flavour of the day and act like retail investors. In 1994, they had loaded up on the global issues of asset-heavy, poorly-governed Indian companies. In the bull market of 1999, they frantically charged into shady software companies either based on imitation or rumours or joint positions with speculators/ another fund, or in expectation of a price run-up before overseas equity floats.
The flight to irrationality, reminiscent of 1993-1995, led them to create exposure of almost 60%-80% in technology, media and telecom companies at huge valuations. In the crazy bull market of 2005-2008, they were over-committed to real estate and infrastructure companies, earning poor returns on capital.
Now, for the first time, FIIs have made mistakes of omission, not commission. They failed to participate in the big run-up in better quality infrastructure companies, defence and energy transition and public sector companies, many of which have reported vastly improved performances.
I have no idea why this has happened. After all, professional investing is a competitive business and performance is benchmarked every month. Consequently, even institutional investors cannot remain immune to buying 'what is working', or what is popularly known as momentum investing.
For the first time in 30 years, I notice FIIs choosing to swim against a rising tide. The question is: now that the US Federal Reserve has started cutting rates and the Indian government’s growth-oriented policies seem to be continuing, will they now start making errors of commission – that is, charge forcefully into a strong bull market?
(This article first appeared in Business Standard newspaper)
Comments
prabhu.ksnp
2 months ago
The analysis is good but the missing piece what did FII exactly do in derivatives. Today they are making money in derivatives not in stocks to adjust that position they do play in stocks. For example i read company name Jane Street capital made 8300 cr + in the last fy in derivatives using algos
Nops, you are missing the point. How much money which comes from abroad under the category of "FII" is genuinely money of the "goras". Lot of it is recycled "desi" money only under the guise of FII money. That's why whenever there are any reforms proposed by Finance Minstry/SEBI related to disclosures in this "FII" category there is lot of paid noise by print and digital media that markets will crash and the market drops for a day or two till the reformists back down.
If "goras" were such fools to always invest at market highs and sell at market lows they would have become bankrupt and wound up shop years back as according to the article "irrationality" started since 1993-95 period.
They don't rule the world by being so careless with their money.
That used to be the story 5 to 10 years back, not anymore to full extent. May be some money would still be coming back and but not the entire money. A lot of reforms have happened in terms of real beneficial owner of all the FII/FPI/P-Note investors in the last 5 years.
And further, how come on almost daily basis, there is divergence between the investment figures of FII and DIIs. Both can't be right at the same time with diametrically opposite investment strategies.
FIIs have always been so. Everyday, ET publishes data on purchase and sale figures by FII and DII, and almost every day (99%) their action are just opposite to each other. If FII is buying, then DII is selling and vice versa.
Now this above analysis suggest/rather confirm about the massive loss or missed opportunity which FIII experienced during the last 30 years is a real one.
FII will rush in when the rupee is weak and leave when rupee is strong which is a simple plain arithmetic which why they can't understand.
The article is a good analysis on FII. I was under the impression hitherto that FII and DII were acting in complementary role and benefitting themselves mutually. But the stats tell a different story. Retail investors need to be careful, as FII may create opportunities for them to buy at low price by way of any unprofessional or unethical means. They will look for such opportunity to create a havoc in market so that they could gain back what they lost in last two years.
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If "goras" were such fools to always invest at market highs and sell at market lows they would have become bankrupt and wound up shop years back as according to the article "irrationality" started since 1993-95 period.
They don't rule the world by being so careless with their money.
And further, how come on almost daily basis, there is divergence between the investment figures of FII and DIIs. Both can't be right at the same time with diametrically opposite investment strategies.
Now this above analysis suggest/rather confirm about the massive loss or missed opportunity which FIII experienced during the last 30 years is a real one.
FII will rush in when the rupee is weak and leave when rupee is strong which is a simple plain arithmetic which why they can't understand.