Swinging With The FII Trend

FIIs are very nimble-footed and make their decisions very fast; this quality helps them to spot outperformers very quickly but the pitfall is they are equally quick in selling the stock. That is the reason why investors must work out a strategy to keep pace. Join Anthony Fernandes as he looks at how stocks with high FII holding have performed over time.

One of the biggest mysteries of the stock market is to uncover details about foreign institutional investors (FIIs) buying stocks. It is not an exaggeration to say that FII buying can often make or break the fortune of a stock. The example which comes to mind immediately is a technology-driven company, Vakrangee Limited. The fortune of this company changed twice within the span of three months backed by heavy FII buying, followed by FII selling. The heavy FII buying took the stock from its 52-week low in June 2015 to its 52-week high in August 2015. However, after news of the failure to get payment licence, the stock hit its 52-week low again in the same month, i.e. August 2015.

The sentiment in the market is to always favour hot stocks which are being bought by the FIIs. This data can be availed by the retail investor every quarter once the companies declare their shareholding pattern. An increase in FII holding would mean that FII buying was active in the last quarter and a decrease of the same would mean that FIIs are exiting the stock as they do not see potential remaining for gains or simply because they want to book profits. As an investor, this information however comes a little too late as the stock price action has already taken place. What really matters is getting a piece of the pie before the FIIs come in. If retail investors can identify stocks before or during FII buying, then the potential for returns are high!

It is clear that FII buying is critical for the Indian stock markets. Domestic institutional investor (DII) buying supports the market but FII buying drives the market to an altogether new level. Take any past instance where stocks or the Nifty have shown big swings; the contribution of FIIs has always been big. We have seen this during the recent meltdown as well with the Nifty collapsing to near 7,500. The exit of FIIs from stocks can often result in mayhem in the stock price. With their current strength, there is no way one can stop FIIs from buying and selling but there is one thing that we as retail investors can do, which is to know where the FII is buying or selling in the markets.

Identifying FII Buying in Stocks

Here are the salient factors you need to keep in mind:

1. FII or FPI Trading Activity

NSE India and the NSDL (National Securities Depository Limited) publish data of FII trading activity on a daily basis. This data can be paramount if you are looking to invest in the long term. By analysing the FII trading activity for a considerable period of time, one can map more accurately whether there is strong buying or strong selling during a certain period of time. Since a major portion of the FII buying is related to frontline stocks which are part of the Nifty, such stocks help to study the price movement relative to the FII trading activity. As shown in the above graph, the movement in FII and Nifty have a strong correlation.

Hence, it would not be wrong to say that FII or FPI trading activity help in determining the long-term trend of a stock. To share an example, let us suppose the FII buying on a particular day is Rs +650 crore – a strong positive signal. Moreover, there is heavy delivery-based buying in stocks such as SBI, Axis Bank and Tata Motors. This level or scale of buying is simply not possible in DII trading and therefore one can add these stocks to the FII watch list. Similarly, unusual price movement and heavy selling in Maruti Motors – otherwise a very stable stock – may indicate that FIIs are probably selling this stock. 

2. Volume and Delivery

Another indicator of FII activity is simply the unusual volume and delivery percentage of stocks. Generally, foreign buyers target the leading company of any sector or theme where high future potential of growth exists. An example, in this case can be HUL, which is a leading company in the consumption sector. Heavy buying by FIIs can easily lead to a spurt in the shares’ volume and delivery percentage. Hence, a retail investor can monitor the daily volume and delivery levels of such stocks and compare them with the average levels to find evidence of FII buying or selling.

3. Themes or Sector

FIIs typically invest in any sector or theme for the long term. Their selection is based on the future potential of any sector. If they are bullish on a particular sector, FII money will flow into those stocks which can give them good return in the long run. At any point of time, there are many favourite themes in the market. Be it consumption, banking, pharmaceutical, and so on. Nothing is permanent and hence this list can change too. By keeping up-to-date with reports from foreign brokerage houses, it is possible for a retail investor to identify such sectors and hence participate in the buying wave.

4. Quarterly Reports

Last but not the least, a sure-fire way to knowing the stocks that the FIIs are picking is simply to look at the company quarterly reports. If FIIs start to reduce their holding in a company, this will be indicated in the shareholding pattern which can be easily identified. Such stocks will start the fall as many investors will then start to offload their holdings believing that the company will not perform well going ahead. Similarly, stocks seeing FII buying finds new investors and the stock price tends to increase. 

Recent Trends

When the corona virus pandemic initially struck, it was assumed that only China was affected. Being the engine for world growth, FIIs and FPIs may have sold off their stocks in that region, anticipating slower growth there. But as the disease spread to almost every continent and country over February and March, including India, FIIs and FPIs sold massively, anticipating a recession. The fourth quarter of the financial year 2020, in particular, has witnessed strong capital outflow by the FIIs. Data from NDSL shows FIIs invested Rs 957 crore and Rs 8,970 crore in the Indian market in the months of January and February, respectively, but took out a whopping Rs 1,18,203 crore in March.

According to a report from a leading broker in India, in Q4FY20, FII holdings in the Nifty 500 hit a five-year low, declining 140 bps quarter-on-quarter (QoQ) and 80 bps year-on-year (YoY) to 21 per cent in Q4FY20, as seen in the graph alongside. FIIs have reduced ownership in 67 per cent of Nifty 500 and 90 per cent of Nifty 50 companies QoQ.

However, a very different trend was observed on the front of domestic institutional investors’ holdings. DII holdings in the Nifty 500 were up 20 bps QoQ and 90 bps YoY to 14.8 per cent in Q4FY20. DIIs increased stake in 61 per cent of Nifty 500 and 78 per cent of Nifty 50 companies QoQ.

In the Nifty 500, FIIs currently have the highest ownership in private banks (44.6 per cent), followed by NBFCs (35.6 per cent), telecom (21.7 per cent), oil and gas (21.3 per cent) and real estate (20.4 per cent). DIIs have the highest ownership in capital goods (23.9 per cent), metals (21.2 per cent), private banks (20.3 per cent), utilities (19.5 per cent) and PSU banks (17.8 per cent).

Performance of Stocks with High FII Holding

Now that we know the role FIIs play on the Indian stock market and the ways in which a retail investor can identify stocks with FII buying, a common question often asked by retail investors is whether high FII holding translates to better returns in the long term? To answer the question, we have taken the top 10 stocks on the BSE 500 as per FII or FPI holding and compared them with the bottom 10 to see whether these stocks have fared better or worse.

It is clear that no stock was spared from the carnage that hit the Indian stocks markets earlier this year. However, we can see that stocks with high FII holding have performed better than their counterparts in every scenario. On a YTD basis, stocks with high FII holding fell by 13.62 per cent on an average as compared to stocks with low FII holding which fell by 26.63 per cent. On a 1-year basis, high FII holding stocks fell marginally 1.04 per cent on an average as compared to low FII holding stocks which fell by 38.78 per cent. Moreover, on a 3-year basis, high FII holding stocks have given positive returns of 7.64 per cent on an average, as against low FII holding stocks which have fallen by 25.82 per cent during this period.

Conclusion

Although the current pandemic crisis has resulted in FIIs selling heavily, stocks in which high FII holding remain have outperformed their peers and have even positive returns on a long term basis. Hence, its not wrong to say that FII presence is usually strong indicator of quality in a stock. However, as a retail investor, you must do your own fundamental analysis before investing in a company. FIIs are very nimble-footed and make their decisions very fast; this quality helps them to spot outperformers very quickly but the pitfall is they are equally quick in selling the stock. One must keep in mind that investing in a stock with high FII holding comes with the risk of the stock falling dramatically once the FIIs begin to sell. In this case, the stock will correct much faster than the market, leading to potentially heavy losses for retail investors. Hence, before pressing the buy button, investors should also screen stocks based on corporate governance, valuations and growth outlook. Consistent investment by foreign investors should only be one of the many filters used to identify a potentially good stock.