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POSTED BY ON September 30, 2010 6:43 pm COMMENTS (10)
While an obvious answer to my question would be that FIIs are not trying to time the markets, still, any valuation level would be better to enter India than these. Am I wrong in thinking so?
It also leads me to think where they were a year back, or maybe 2 years back. Fine, you might not be able to time your entry into markets at the lowest levels, but surely you would not be crazy enough to enter at levels of PE 24 and above. And their participation is not normal. There are billions being pumped in daily. It’s very strange.
One explanation I can think of is that a lot of the US currency being printed in large numbers is finding its way to India. But is that an explanation enough to explain this crazy FII inflow at such high valuation levels?
Any thoughts?
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i observed that fii is not entering at high level. on the contrary, the market level is increasing solely because of their purchases, as indian mfs are selling! whether who is printing currency (india or western countries), still our currency is cheaper w.r.t. most of prominent currencies, than what it was in last quarter of 2007by more than 10%, so our shares to them. and if we believe the 8-9% gdp growth for india this year, and next year, p/e should also come down as time passes. it may happen we will enter at more high level, and by the time fii withdraw, as happened after jan 2008.
@bharat shah
“observed that fii is not entering at high level. on the contrary, the market level is increasing solely because of their purchases, as indian mfs are selling!”
You said FIIs are not entering at a high level. At the same time you said market is increasing because of their purchases. Both things are contradictory. What you’re saying means that FIIs are entering Indian markets at these high levels (i.e. buying from the selling mutual funds).
“8-9% gdp growth for india this year, and next year, p/e should also come down as time passes”
In the last 10 years, it has never happened that the PE fell solely because the “E” increased so much. It has always been largely due to a correction and some part due to the “E” increasing.
@Ram
FIIs are not crazy. Their investments are based on two aspects:
1. Difference in Returns expectation:
In US, risk-free rate of government securities yield is about 1%. Hence their returns expectation would be around 3-5% in indian equities. whereas in india risk-free rate of 10-year government securities yield is about 8%. Hence his returns expectation would be around 10-12% in indian equities.
For e.g. say today sensex is @20,000 and both FIIs and domestic investor are investing in sensex ETF. FIIs sensex growth expectation is 20,600-21,000(3-5%) after one year whereas for indian investors sensex should grow to 22,000-22,400(10-12%) after one year to get returns above risk-free govt securities.
2. Economic prospectus of developing markets:
Developing markets like india, china and brazil and growing at the pace of 8-10% whereas as developed western markets are growing at the pace of 2-3% (actually their economic growth is contracting on year-on-year basis :() Hence as a normal investor they will seek markets where there is economic growth.
Taken those two things together, u think in the place of FIIs.
where will the investor invest who is having returns expectation of 3-5% ?
Option A: Invest in market whose economic growing @8-10%
option B: Invest in market whose economic growing @ 2-3%
Obviously everyone will be choose option A, right?
Above all their government is providing cheap credit(with 1%interest rate) to reboot the economy. But FIIs get this cheap credit and invest in emerging markets and cooly pocketing 2-4% profit (after deducting 1%interest rate from their returns of 3-5%).
Hence indian investors with returns expectation of 12% should patiently wait for the market to be available at cheap valuations.
Hope it clears….Happy investing 🙂
@MoneySavingsHelp
Thanks for reply. You make a good point on the part about a part of the FIIs being involved in short-term trading as opposed to long-term investing.
I did not mean that the money being printed in the US is being printed only for investing in India. But, a lot of that money is finding its way to India as well (matter of chance, but is happening). Maybe an equal part is finding its way to Kuala Lumpur as well.
@Jagadees
Thanks for your reply. Very insightful as always.
I do know and understand the fact that the FD (or CD) rates in the US are pretty low and the government bonds are not exactly attractive either. My confusion is more towards the timing of their entry. They’re not foolish people right? They would have done their research as well (at least one would hope so).
Why wait till the markets here become so overvalued? Even a novice investor could tell that the markets now are too boiled up here. And at the same time there is this rush of money coming in. The India story was intact even at 13,000 or 14,000. Maybe at that point there should have been this money rush. Maybe even later at say 15,000 or 16,000 levels. But at this point its almost like playing with fire. Or maybe I’m too conservative.
@Ram
your observations are correct. But as per data available with SEBI about FII investment – there was steady increase in FIIs investment since february of this year. But the sudden increase in FIIs investment during the month of september which fuelled this rally is on the back on 2 important datas: data about growth in industrial production(april-july Q) which is almost doubled to 13.8% and revised GDP growth for the current year to 8.5-9%. I guess this 2 datas to be the positive trigger for the enormous fund flow in the sept month. Even at the current valuations, the forward PE for the year 2011 is around 19-20 only. But above said they will also withdraw the money in droves when there is negative news in international economic market.
source: http://www.thehindu.com/opinion/editorial/article634168.ece
Hope it clears 🙂
@Ram
I wont agree that FIIs not invested @15,000 level. If you see the graph in the following link: http://money.outlookindia.com/article.aspx?267169, we could figure it out that FIIs investment are slowly and steadily increased from may 2009.
The current rally from 18,000 level mainly due to sudden spurt in FIIs investment in sept on the back of 2 important data: i.e. rise in index of industrial production to 13.8% (which is almost doubled when compared to last year and it exceeded beyond market expectations) and revised india’s GDP projection for the current year to 8.5-9.0%.
Even at the current market valuations, the sensex is trading at 2011 forward PE of 19-20.
so, i would say that FIIs are reacting to every positive developments in the emerging markets.
what do u say?
@Jagadees
Thanks for an informative reply. Makes more sense now. But I do believe they’re being a bit over enthusiastic. Again, maybe I’m just too conservative.
Thanks, again.
@Jagadees
You spoke about FIIs pocketing 2-4% profit. Why don’t they invest in FDs in India? They can get 7.5% at current rates for 2 odd years. Sure returns.
Is it that they are not allowed to? Any idea?
Thanks,
Ram.
@ I dont think FIIs allowed to deposit money in Fixed deposits of bank. In addition, Fixed deposits will earn 7.5% interest only if you lock your money for 7 years or so. FIIs wont be willing to lock their money for such a long time. (always they want quick bucks dude :)) current savings account which wont lock money(which everyone will open in bank) will give only 3-3.5% interest in banks.
Guys correct me if am wrong.
Happy investing 🙂
Some points from my side Ram.
What I’ve observed and discussed with some reputed broker who are dealing with FII’s is that MOST of them trade in technical charts very closely.
They enter on starting of strong bullish chart & exit on weak chart. They book profit and exit & most of the Indians enter then when they exit.
Look at technical Sensex Chart of last 1 month, or technical chart of Kuala Lampur Composite Index from the last 6 months, you’ll get to know, why FII’s are investing so heavily in these countries.
Yes, they see fundamental aspects of the company also. What I conclude, is that they choose string fundamental companies and out of that, they short-list companies with string technical chart.
That’s the reason, NTPC is not rising while HDFC is.
Your point that USA is printing money just to invest in India is not right. Any country prints currency after examining certain factors like interest rate, repo rate, reverse repo rate, GDP growth, liquidity in the market, debt on country, Gold reverse etc. They can’t go blindly on just 1 point.
Hope it will help you.
MoneySavingsHelp