4 reasons why you should buy while FIIs sell, if you are in India

This is a great article from Sandeep Shanbhag on
the investment approach to adopt in India in the current market scenario. I'm reproducing
this article completely with all links and credits, to ensure credit is
given where it belongs. The purpose of reproducing this article on this
blog is only to 'spread the light' and share my learning with everyone.

- Kaustav

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4 reasons why you should buy while FIIs sell
Sandeep Shanbhag

Wednesday, October 29, 2008


LET’S assume that you have invested in both, the US and the Indian stock markets. Now, it turns out, while your Indian investments are doing exceedingly well, the US portfolio suffers acute losses.

What is the most obvious thing you would do?

You would book profits in India, in order to make up for the US loss. Right?

This, in a nutshell, is the current scene today. The only difference is that the investors are foreign institutional investors (FIIs). These are institutions that operate mutual funds, hedge fund and portfolio management services abroad and invest the fund money in other countries. FIIs by definition, have world wide investments. So, not only India but other Asian markets are also facing a sell off.

What happens when FIIs sell?

FIIs have a huge exposure to the Indian market. Due to this, their buy and sell actions have a considerable impact on the market.

Recently, FIIs have been on a selling spree. This is one of the reasons for the markets to register steep falls. If FIIs are selling, should you buy?

The US is in turmoil but there is nothing wrong with us. The following factors just reaffirm this:

1. Toxic securities (such as MBS and CDOs) are conspicuously absent in our market, thereby preventing us from catching the infection.

Mortgage Backed Security (MBS) and Collateralized Debt Obligations (CDOs) are securities which are backed by a pool of mortgages that are paid by home loan takers in the US. So, if a home owner defaults on his repayment, the MBS holder suffers. Read all about these instruments and how they caused the big collapse.

2. As far as domestic operations of banks are concerned, RBI has been extremely strict by continually increasing the risk weights to real estate and housing loans, thereby discouraging banks to get ahead of themselves, in a bid to increase business.

3. Unlike the West which has a negative savings rate, our domestic savings rate is more than 35 per cent, that means, on an average, Indians save 35 per cent of their income. So, even if there is a protracted slowdown, we would still have considerable demand for products and services, which in turn will help the economy to achieve good growth.

4. Amongst all emerging economies, our export to GDP ratio is the lowest. This means that even if our exports went down, our growth won't be significantly impacted. Therefore, even a full blown US recession will shave only around 40 to 60 basis points off our GDP growth rate. So, we will still have the capacity to chug along at an 8 per cent plus rate.

India - a safe haven

The fundamentals of our economy make our market nothing short of a safe haven during such turmoil. So, I don’t care if the market falls to 9,000 or even lower. Once this storm blows over, things will be back to normal.

In the meanwhile, your fortune as an investor would depend on how you react, or rather, don’t react, to the situation.

The great fall of the market isn’t going to suddenly reverse the quality of the companies listed. If anything, I am looking forward to picking up some cheap but quality stuff.

Photograph: Spencer Platt/Getty Images
Disclaimer: The contents of the article or are for information purpose only and are in no way meant to be advisory in nature. The author does not claim responsibility for actions taken by readers on the basis of the Article. Please consult your financial advisor for your personal money management.

Source: http://wealth.moneycontrol.com/showstory.php?id=11311

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This is a great article from Sandeep Shanbhag on
the investment approach to adopt in India in the current market scenario. I'm reproducing
this article completely with all links and credits, to ensure credit is
given where it belongs. The purpose of reproducing this article on this
blog is only to 'spread the light' and share my learning with everyone.

- Kaustav