A tale of two indices

India Infoline News Service | Mumbai |

Taking the same base of 2008, if you plot it, then the foreign index is at 41,000 whereas the domestic index is still at 16,000-17,000. In other words, after 5 years we are still below the previous peak.

If Charles Dickens looked at our market today, he would have probably penned it this way - It was the best of times (Sensex at 21k), it was the worst of times (GDP growth at a low). It was the age of wisdom, it was the age of foolishness. It was the epoch of belief (the India story), it was the epoch of incredulity (Digging for Gold under a temple because a dream). It was the season of Light, it was the season of Darkness, It was the spring of hope (for FIIs), it was the winter of despair (for retail investor). We had everything before us, we had nothing before us. 

In Indian stock markets, there are FIIs and there were the domestic funds. And there were retail investors. 

Ever since FIIs were allowed to invest in the Indian capital markets, they have been the topic of discussions at coffee table conversations and even the roadside 
chai stalls. The role of the foreign hand was never more evident; a spurt in the market and the common refrain was that FIIs are buying. Similarly, in case of a crash, consensus would be that FIIs are offloading some counters or doing some basket selling depending on the intensity of the fall. It is a pity that after 20 years of reforms, we have still not been able to build a sizeable domestic retail investment pool to counter the effects of the foreigners!

The following 3 charts tell the picture clearly:


IN 5 years since Jan 2008, Index has scaled the peak of ~21000.

TO an FII, it feels that Sensex is up to 41,735 pts. (index adjusted only for the top 15 stocks with highest FII holding)

TO non-FIIs, it feels that Sensex is down to 16,780 (index adjusted only for the top 15 stocks with least  FII holding)

To a retail investor it feels like Sensex is down to 9044 points.  = down 56% in 5 years. (Sensex rebased with the performance of the BSE Small cap index)

To a retail investor it feels like Sensex is down to 12728 points.  = down 39% in 5 years. (Sensex rebased with the performance of the BSE MID cap index)

The market is suffering from bipolar disorder. On Tuesday, after the RBI’s monetary policy move of hiking repo rate by 25 bps and reducing MSF by 25 bps, the indices seem to be celebrating hitting a calendar year high. The same happened in diwali of November 2010 when FIIs, domestic institutions and retail investors bought anything and everything that caught their fancy irrespective of value or price. The market then looked set to scale new highs and everyone was proclaiming the return of the bull run. It took a couple of days more for a change in sentiment and new highs have evaded the indices for almost three years thanks to a series of scams and a slowdown in the economy.

While the Sensex is around the 21,000mark, the feeling at the ground level is close to maybe 10,000 levels. The brokers are not happy. The retail investors are not happy. Why then is the Sensex perched at these levels? As mentioned earlier - foreigners are buying.

The truth is that there are few stocks that foreigners like and those stocks happen to be performing really well keeping the indices high. The rest of the market is languishing and nobody cares. Category A where the FII holding is high and continues to remain high and is liked by the foreigners and category B which is not so much liked by the foreign investors. Taking the same base of 2008, if you plot it, then the foreign index is at 41,000 whereas the domestic index is still at 16,000-17,000. In other words, after 5 years we are still below the previous peak. This indicates to a large extent how FIIs are driving the Indian market.

Are the FIIs smarter than domestic investors in stock picking? Or are they lucky? This is a defensive market where FMCG / IT and pharma is doing well. For lovers of HUL, remember it underperformed hugely till January 2008. We forget that the same sector which is now under performing was best performing sector in the bull run of2003-2008. So the ideal strategy would be to stick to domestic funds’ choice in the bull market and lap on to foreign funds’ picks in the bear market.Unfortunately nobody knows the state of the market before hand. FIIs when they look at the India growth story - they like to buy large cap stocks. Hence their holding typically comprises the likes of Infosys, HUL, ITC, TCS and HDFC and other Sensex stocks. Their exposure to small caps and mid-caps at the moment is negligible. 

Why is the retail investor feeling so down? If you look at the small cap and the mid cap index it is down significantly from the previous peak. It is too early to pop the champagne and start celebrating that we are on high because the illusion of the main indices at a high is far from the truth.
 

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