Should retail investors follow FPIs?

Foreign Portfolio Investors (FPIs) hold a substantial chunk of the Indian equity markets and their movement has the ability to markets substantially, either positively or negatively. If retail investors track FPI movements, key investment priorities and possible market movements may be discerned.

Reasons FPIs invest in India

"FPIs invest in Indian equity markets because they believe in the Indian growth story," says Nitin Bhasin, MD and head of equities research, institutional research at Ambit Capital.

Factors that make foreign investors gravitate to Indian equity markets are India's rising and young population, the rising middle class with their disposable spending and rising consumption. Increased connectivity between India and the world has also been a factor in FPIs investing in India.

"There are various sorts of FPIs who invest into India and all have different priorities in what they expect from Indian equities," says V K Vijayakumar, chief investment strategist at Geojit Financial Services.

For instance, endowment funds are long-term investors who are looking at the Indian growth story and not worried about short-term fluctuations or volatility. On the other hand, hedge funds are fleet footed with only quick (and a lot of) money as their priority.

However, there is an element of unpredictability and uncertainly of FPI investments into India. "Though FPIs may have a long-term positive view of India, they tend to react to changes in the operating environment," says Sriram Krishnan, MD and head of security services, Deutsche Bank India. Thus, elements like currency volatility, prices of crude, etc, cause FPIs to take a closer look at their Indian portfolio with a possible sell decision if the offing.

Another red flag for FPI investment is changes in regulations in India without prior consultation.

Foreign investment can move markets

FPIs hold 23.6% of the ownership of the BSE 200 Index as of the September quarter, according to data compiled by Kotak Institutional Equities. This is down from the 23.8% in the previous quarter. FPIs sold a substantial Rs 10,200 crore in the quarter-ended September 2018.

So, not only do FPIs have the power to move equity markets, how they are likely to view the equity markets going forward will also be of importance.

Key concerns

A key concern for FPIs is whether Indian equities correctly priced? "FPIs may not rush in to buy Indian equities as Indian stocks are (currently) not cheap," points out Vijayakumar.

If earnings growth, political situation in the country and the currency continues to remain weak or uncertain, then FPI funds could certainly flow out of the country, says Nitin Bhasin of Ambit.

Also, there is little attractiveness vis-à-vis Indian equities from other emerging markets in terms of earnings growth or Return on equity (RoE).

Takeaways for retail investors

"Retail investors can certainly look at strategies FPIs follow in their investments into India," says Krishnan, stressing that the investor needs to check that the FPI in question has a good track record in the first place.

FPIs look at value stocks with long-term goals. Re-balancing of the portfolio is only done with medium- to long-term goals in mind and not as a part of just buying or selling because of market movements.

According to Bhasin, one lesson retail investors can learn from FPIs is to diversify out of your home country's investment options.

"Retail investors can certainly track what FPIs are doing (investing), but exiting the stock ahead of the FPIs or even with them may not be possible," points out V K Sharma, head PCG and capital market strategy, HDFC Securities. As a counterpoint an investor can look at where FPIs are investing and make their own balanced investment decision.

Sharma also adds that FPIs are very selective in their stock picks, but then one needs to follow them thoroughly.

Viyayakumar advises that rather than following FPIs in their investment blindly, retail investors could used such investment as a guide to market trends.

"Study the performance or track records of the companies that FPIs are investing in," says Pritam Deuskar, fund manager, Bonanza Portfolio. FPIs typically invest into companies that have strong and sustained Return On Equity (ROE), Return On Capital Employed (ROCE), are debt free and at reasonable valuations. "All other parameters are secondary," he adds.

But remember there are certain advantages that the FPIs would have that an investor may not have.

"Most FPIs invest in multiple geographies and tend to change their allocation (of investments into a particular country) rather abruptly in the event of significant change in risk perception for any given geography," says Krishnan. Thus, an FPI might book losses and move money to another country abruptly upon the happening of certain contingent events. "However, retail investors may be unable to similarly move away from India as such," Krishnan points out.

Reading the FPI tea leaves

In the September quarter FPIs were overweight on Indian banks and IT services; underweight on consumer staples and capital goods, according to data from Kotak Institutional Equities.

"Banks grow faster than the economy and the better managed private sector banks grow at triple the rate of the economy," say Sharma on why FPIs were looking at bank stocks. He suggests a weight of around 30% banking stocks in your portfolio.

"In IT, India has a clear cost and skill advantage," says Vijayakumar on why this sector is attractive to the FPIs.

"Consumer staples relatively offer much lower near-term earnings growth versus discretionary or auto stocks and trade at higher near-term valuations," says Bhasin, on why FPIs could be avoiding the sector.

The capital goods sector is dependent on either the power sector expansion or the large industrial expansions, and both are missing for a while; add to this not so pristine balance sheet and government involvement. "Hence the low FPI ownership," explains Bhasin.

Bhasin, however, does stress that while FPIs may be selling these sectors there is no need for the retail investor to avoid them. "Look at quality stocks in the sectors with reasonable valuations. This is an opportunity for the investor," says Bhasin.

FOREIGN LESSONS

• FPIs look at value stocks with long-term goals
   
• Re-balancing of the portfolio is only done with medium- to long- term goals in mind and not as a part of just buying or selling because of market movements.
   
• Diversify out of your home country's investment options
   
• If FPIs are selling in some sectors, don't avoid them; instead look at quality stocks in these sectors with reasonable valuations