Highest-ever FII flows spur lowest return in 6 years

Foreign institutional investors (FIIs) pumped in more money into India in 2010 than ever before, but it hasn’t led to a blowout in the Sensex.

The benchmark index for the Bombay Stock Exchange has so far risen just 14.14%, the lowest positive return since 2004.

In 2004, the benchmark had risen 13.08% as foreign institutional investors net-bought (purchases in excess of sales) Rs38,966 crore of Indian equities.

This year, they net-bought an astounding 3.4 times more, or Rs1.33 lakh crore, the most since they were allowed to invest in Indian equities in late 1992.

This has taken the Sensex from 17464.81 as of December 31, 2009, to 19934.64, a gain of 2469.83 points, on Tuesday.

“A significant portion of the money gone into the primary markets. Qualified institutional placements (QIPs), preferential issues and other primary market offerings have absorbed some of the liquidity,” said S P Tulsian, an independent investment advisor.
QIPs allow companies to sell a block of shares to institutional investors to generate funds. There were 57 such placements in 2010 worth Rs26,112 crore.

The primary market or IPOs accounted for `38,176 crore of the FII purchases.

Over 71% of the flows have come in to the secondary markets, with Rs95,760 crore pumped in through their open market purchases.
The reason this has not bouyed markets is because the action has become more stock-specific.

“While certain segments of the market such as realty and commodities may not have done well, other themes such as consumption and metals have given good returns. The market has merely become more stock-specific,” said Ramesh Damani, a member of the Bombay Stock Exchange.

During the year, the markets have also been impacted by issues of sentiment driven by global and local triggers.

Fears of financial authorities losing control over the European sovereign debt crises caused markets to weaken after crossing the 21000 mark during Diwali.

It has also been affected by domestic issues such as corruption allegations involving top political leaders such as former telecom minister A Raja  and his allocation of airwaves to mobile companies at throwaway prices.

Most recently, a bribery scandal involving top financial institutions and their officials hit market sentiment in November.

The remainder of the year may yet pose a surprise, say JP Morgan analysts.

“December has typically been a good month for Indian equities (average return of 4% over the last two decades) and we would not be surprised to see a year-end rally,” Bharat Iyer, Bijay Kumar, Gunjan Prithyani and Adrian Mowat, said in a recent note.

The fundraising trend for the primary market is expected to continue through to the fiscal year end. Around `18,000 crore is expected to be raised every month over January-March which may temper flows, they said.

The increasing depth of the markets could also help bring in incremental flows.

“Going forward we would continue to see incremental money allocation towards primary markets. However, this allocation would not hinder the flows to secondary markets as these issues facilitate higher inflows into the country,” said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.