FII's on a Selling Spree

Thu, 11 Feb Pre-Open

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While many are optimistic about the Modi government, a different story has been brewing somewhere else. The hopes for 'Achhe Din' are still alive, but not for Foreign Institutional Investors (FIIs). As seen by their money inflow patterns, it seems that FIIs may have given up hopes on reforms promised by the Modi government. Or at least, they are tired of waiting this long. As per an article in Business Standard, FII's withdrew around Rs 127.8 billion from the beginning of the year till 5 February 2016. This is the biggest sell off by FIIs during such a period in the preceding nine years.

Having said that, the sell-off cannot be solely attributed to fading of expectations from the present government. The increase in interest rates by the US Federal Reserve Bank has played its part too. The Fed raised interest rates for the first time in seven years on 15 December 2015, thereby leading to an increase in the yields on the US Government bonds. US government bonds are considered to be one of the safest investments. The increase in yields along with heightened risk aversion have meant that FIIs are increasing their exposure to the US treasuries and taking out their money from volatile emerging markets.

If reports are to be believed, sovereign wealth funds from the Middle East too are exiting the Indian equity markets. The sole reason for this liquidation is that oil producing nations are facing cash crunch. The act of sovereign wealth funds to some extent seems pragmatic. Oil producing nations are facing cash crunch and the only option to bring in liquidity for them maybe to liquidate their investments. However, it should be noted that sovereign wealth funds are not the only Foreign Institutional Investors around.

Currently, world is flooded with cheap money which have kept the bond yields at near zero levels. Countries such as Switzerland and Japan are facing negative bond yields. Whereas, bond yields in Europe and US are also at near zero levels. In the long run, India with its stable economic outlook is likely to remain a preferred destination. Thus, FII outflow maybe a problem in the near term. However, long term investors may have little to worry about.

We believe that Indian investors should not base their investment decisions solely based on what the FIIs are doing. FIIs have their own set of criteria for investing in the markets, which may not be relevant for an Indian investor. For an Indian investor, a more bottom-up approach, which involves sticking to fundamentally sound companies trading at reasonable valuations, remains an apt one.

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