A study of FII flows over the years: IIFL Capital Services

25 Apr 2023 , 12:16 PM

As an example, it might not pay to base decisions on private banks doing well whenever FIIs buy – HDFC Bank has never been in the top 20 among Nifty performers in the 4 buying periods that were studied by analysts at IIFL Capital Services. IT and Pharma are decidedly not defensives. Going forward, over the medium term, the impact of FII buying will be less pronounced than hitherto, as DII investments have substantially increased.

6 periods with FII burst

Based on a threshold of US$10 billion FII flows, analysts at IIFL Capital Services have identified 4 inflow and 2 outflow periods. 

They see: 

• Especially over the last 8-10 years, cumulative DII investments have risen faster than FII investments – this trend should continue, based on higher growth in India and an increasing proportion of savings dedicated to equity.
• This also shows up in more muted outperformance of many sectors during FII bull runs over May 2020-March 2021 compared to April 2009-December 2010.
• Extreme outperformers in FII bull runs or underperformers during heavy FII selling see contrasting movement in shareholding between FIIs and DIIs.

Busting some myths 

In sectors and stocks, analysts at IIFL Capital Services see: 

• Perceptions such as private banks being outperformers if FII buying happens might not hold true always, or even at all.
• While a few sectors were faithful “FII Beta” sectors, most had idiosyncrasies that dominated, e.g. PSU banks.
• Some of the worst-performing sectors over these periods like Real Estate and Telecom may have left their worst periods behind; whereas a key all-weather performer Auto, may not have quite as much wind in its sails in the medium term.
• IT and Pharma are decidedly not defensives – in fact, data shows Energy (including Upstream oil) is more defensive.
• Capital Goods, Durables, Private banks, etc., were fair weather sectors.
• PSUs, FMCG, Energy and Utilities were classic defensives.

In GARP we trust

In 2023 YTD, continuing the trend of last two years, IIFL Capital Services’ picks have done better than indices in most market cap categories. Analysts at IIFL Capital Services have removed ICRA and inserted PNC Infra in their top picks list, and continue with the GARP approach.