NBFCs: Money Trees

NBFCs are hot. Here is what to buy

 

One business segment that is doing extremely well is non-banking finance. NBFCs (non-banking finance companies) were down in the dumps in the 1990s and early part of the 2000s but those that have survived have come out stronger. Indeed, while asset-based lending may look like a commodity business, each of the major NBFCs  today has an edge either...

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Do FIIs buy high and sell low–II? Momentum-chasing

In the first of a three-part series we saw how FIIs investment crests near market peaks. In this second part we look at how FIIs, like retail investors, chase prices up and down

We pointed our yesterday that the maximum investments by FIIs (foreign institutional investors) came when the index levels were near their peaks. In most cases, after the FIIs have rushed in with massive investments, the subsequent performance of indices has been below average. The peak of 2010 November has still not been surpassed while the two months prior to that witnessed the largest two-month burst of FII investment ever. The large investment after the market index has run up a lot is a sign of what is called performance-chasing or momentum-chasing.

This happens after the market has turned around and run up against the prevailing wisdom. Investors who were out of the market suddenly feel left out. Institutional investors have a bigger problem. They are held accountable for performance vis-à-vis a popular market index like the Sensex or Nifty. When these indices take off, they feel compelled to chase these indices so that their performance does not suffer. This is why not only have the largest monthly FII investments have been timed with medium-term market peaks, but many large monthly investments have also come well after the market bottoms, trying to play catch up with the rally. The opposite of momentum-chasing happens when the market is sliding. At those times, momentum-chasing takes the form of selling.

Here is some data of both kinds. In October 2008, it seemed that the world would come to an end, as the global financial crisis reached its climax. Investors were shell-shocked at the ferocity with which the market had declined in a few months. For months thereafter the aftershocks were visible. FIIs were selling almost every month, quite understandably, because they were unsure of the future. However, almost all global markets made a low in early March 2009 and embarked on a massive rally. FIIs, who like retail investors, avidly watch prices (formed by millions of others) to decide what they should be doing, were net sellers even in March 2009. By April the Sensex was over 11,400, from over 9,700 in March. Did they see a train pulling out of the station?  


In April 2009, FIIs invested Rs5,560 crore, an average month, by their normal standards. In the third week of May, the Congress-led government came to power, which made the Sensex shoot up to over 14,600 by the end of May. The train seemed to be certainly leaving the station now and the FIIs couldn’t miss it at any cost. They invested almost Rs14,000 crore that month—well after the Sensex was up from March 2009 lows and exactly timed with the sudden market momentum. In September 2009, as the market trended higher, they invested over Rs13,3000 crore. But chasing momentum irrespective of valuation levels can often be disastrous. The very next month of this huge investment, the Sensex promptly fell below 16,000.

Evidence of performance- or momentum-chasing is pervasive. In August 2011, the Sensex was around 18,200 when the Eurozone crisis erupted. The market fell and the FIIs turned sellers. As the market headed lower they were not buying. They were selling in a market that was already low. In November and December 2011 when the index was at around 16,000 FIIs were net sellers after turning marginal buyers in October. But when the market picked up in January 2012, the upward shift in momentum had FIIs scrambling to be net buyers, leading to the mother of performance chasing—the market peak in February 2012 when they put in their highest monthly investment ever—Rs23,236 crore. By May 2012, when the Sensex was down below 16,000, FIIs were selling!

 

The best examples of momentum-chasing can be found in a rising market. When the market declines, FIIs usually stop buying. When it hits 52-week or multi-year lows, they sell. This is what happened in May 2010. As the Sensex headed towards 16,000 from over 17,500 the previous month, FIIs pressed net sales of a huge Rs12,071 crore worth of stocks.

Retail investors jump in at the peak, buy when the market has run up and sell when the market has fallen a lot. FIIs seem to be prey to a similar behavioural pattern. They also do one other thing that retail investors do—panic selling during a severe market decline. We will look at that in the third and last instalment of this series.

Also read: Do FIIs buy high and sell low – I? Maximum buying at peak index levels
 

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Sensex, Nifty on a fresh uptrend: Wednesday Closing Report

A fresh upmove has started. As a long as the indices don’t close below any previous day’s low, the market is headed higher

 

The market closed at its highest level since January 2011 after the RBI governor on Tuesday rekindled hopes of a cut in interest rates going ahead, on the decline in headline inflation. A fresh upmove has started. As a long as the indices don’t close below any previous day’s low, the market is headed higher. The National Stock Exchange (NSE) reported a volume of 69.48 crore shares and advance-decline ratio of 930:472.

The market witnessed a firm opening on hopes that the easing of the headline inflation might prompt the Reserve Bank of India (RBI) will cut rates in its policy meeting. Asian markets were higher in morning trade as the fall in the value of the yen boosted prospects for exporters in the region. Overnight US indices scaled fresh highs on speculations that the Federal Reserve will not withdraw its support to the economy.

The Nifty opened 24 points higher at 6,019 and the Sensex started the day at 19,798, a gain of 76 points over its previous close. The opening figures on both benchmarks were also their intraday lows.

Buying support from rate-sensitive sectors led the market to a higher trajectory as trade progressed. Gains in banking, realty, auto and capital goods led the benchmarks on a northward journey in noon trade.

The benchmarks continued to rise in the late session and hit their highs in the last half hour of trade as across-the-board buying led all sectoral gauges in the positive. The Nifty touched 6,157 and the Sensex climbed to 20,242 at their respective highs.

The market settled near their highs as hopes of a rate cut by the RBI gained momentum as governor D Subbarao on Tuesday remarked that he would take note of the fall in the inflation rate for future policy decisions.

The Nifty climbed 151 points (2.52%) to 6,147 and the Sensex surged 491 points (2.49%) to close the trading session at 20,213.

While the broader indices also closed in the positive, they underperformed the Sensex, as the BSE Mid-cap index climbed 1.58% and the BSE Small-cap index advanced 0.98%.

The broad-based rally saw all sectoral indices closing higher. The top gainers were BSE Realty (up 4.04%); BSE Bankex (up 3.95%); BSE Capital Goods (up 3%); BSE PSU (up 2.36%) and BSE Auto (up 2.29%).

Among the 30 stocks on the Sensex, 29 settled higher. The key gainers were HDFC (up 4.70%); State Bank of India (up 4.07%); Larsen & Toubro (up 3.85%); ICICI Bank (up 3.80%) and HDFC Bank (up 3.72%). Wipro (down 0.53%) was the lone loser.

The top two A Group gainers on the BSE were—UCO Bank (up 8.80%) and Punjab National Bank (up 7.49%).


The top two A Group losers on the BSE were—Amara Raja Batteries (down 2.85%) and Gujarat State Petronet (down 1.75%).

The top two B Group gainers on the BSE were—Wanbury (up 20%) and Nectar Lifesciences (up 19.96%).


The top two B Group losers on the BSE were—Remi Metals Gujarat (down 19.27%) and Emmsons International (down 18.44%).

Of the 50 stocks on the Nifty, 47 ended in the in the green. The main gainers were Punjab National Bank (up 7.60%); Reliance Infrastructure (up 5.22%); IndusInd Bank (up 5.14%); Kotak Mahindra Bank (up 5.12%) and DLF (up 4.78%). The losers were Power Grid Corporation (down 0.74%); UltraTech Cement Co (down 0.51%) and Cairn India (down 0.08%).

Markets across Asia, with the exception of the KLSE Composite index, closed higher with the Nikkei 225 rising to a five-and-half year high on a declining yen. The rest of the Asian pack closed with modest gains as concerns about the global recovery persisted.

The Shanghai Composite rose 0.35%; the Hang Seng gained 0.50%; the Jakarta Composite added 0.16%; the Nikkei 225 jumped 2.29%; the Straits Times rose 0.26%; the Seoul Composite gained 0.12% and the Taiwan Weighted surged 0.81%.  Bucking the trend, the KLSE Composite lost 0.30%.

At the time of writing, the key European indices were trading higher as Bank of England governor Mervyn King that a recovery for the UK economy was within reach. At the time, the US stock futures were mixed with a positive bias.

Back home, inflows from foreign institutional investors in the equities segment on Tuesday were offset by withdrawals by domestic institutional investors. While FIIs pumped in funds totalling Rs420.99 crore, FIIs pulled out Rs412.66 crore from stocks.

Glenmark Pharmaceuticals’ US subsidiary Glenmark Generics Inc has received approval from the US health regulator to sell generic versions of AstraZeneca's Zomig and Zomig ZMT tablets, a migraine drug, in the American market. According to IMS Health, for the 12-month period ended December 2012, the products garnered annual sales of $176 million. Glenmark Pharma gained 2.53% to close at Rs562.50 on the NSE.

Tata Communications today said that it will delist its American Depository Shares from the New York Stock Exchange, due to low trading volumes. The decision to terminate its ADR programme was aided by new public shareholding norms by the Indian market regulator, SEBI. The guidelines dictate companies listed on Indian bourses to offload at least 25% of its stake to its shareholders. Tata Communications rose 0.78% to 239.20 on the NSE.


Tata Chemicals today said it has partnered with Institute of Chemical Technology (ICT) for creating an endowment chair with a donation of Rs3.5 crore to promote research in chemical engineering. The two entities would collaborate on several new initiatives such as conducting R&D programmes with a focus on sustainability, green chemistry, undertaking projects at ICT based on chemical technology related challenges. The stock advanced 0.62% to close at Rs324 on the NSE.

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