The year 2013 is seeing a breakdown in the long-standing correlation between foreign portfolio inflows and investor wealth creation in domestic stocks. In the last 12 years, stock market's value has risen whenever foreign institutions pumped money into the nation's equities, but the reverse is happening since January, according to a Business Standard study.
So far this year, foreign institutional investor (FII) inflows have coincided with a decrease in investor wealth. The analysis compared the increase in market capitalisation of all the listed BSE companies to the amount of FII flows in the calendar year.
FIIs have been net buyers by Rs. 53,377.60 crore thus far in 2013, but the capitalistion of companies listed on the BSE is down
Rs.5.96 lakh crore. This means every crore of FII inflows has coincided with a decrease in investor wealth by Rs.11.17 crore.
Traditionally, whenever foreign institutional investors have been net buyers in India markets, investor wealth has soared.
In 2007, at the height of the previous bull run, FII inflows of Rs.71,486.3 crores saw a net increase of Rs.36.01 lakh crore in the capitalization of BSE companies. This amounts to an addition of Rs.50.38 crore for every crore of inflows.
Since 2001, every crore of inflows has coincided with at least nine times the amount of increase in market capitalization or investor wealth, according to the analysis.
Murali Krishnan, Head – Institutional Broking, Karvy Stock Broking said the fall in midcap and small cap companies as a possible reason for the slide.
"Domestic institutions have been selling. Also the market capitalization fall could be because of the serious erosion in stocks outside the top 100 names," he said.
Domestic institutions have been net sellers by Rs.33,762.21 crore so far in 2013, according to stock exchange data. They had been net sellers by 56,923.14 crore in 2012.
The BSE's midcap and the small cap indices are down 14.80% and 22.39% respectively, compared to a 3.83% fall in the Sensex.
Vikas Khemani, President, Co-Head Wholesale Capital Markets, Edelweiss Securities said that additional capital raising could have absorbed some of the inflows.
"There has been a lot of fund raising from companies, as well as divestment which has led to absorption of capital," he said.
Companies, including public sector ones, have raised Rs.23,178.41 crore through the equity market in 2013 according to Prime Database.
The government has announced a further divestment program of Rs.55,214 crore for the financial year ending in March 2014 in its budget.
"The relationship of FII inflow and the equity market has broken down completely," said a recent Goldman Sachs report
The correlation is likely to come back as domestic institutional selling subsides, said G. Chokkalingam, Chief Investment Officer, Centrum Wealth Management.
"Domestic institutional selling is expected to come down and there is continued appetite for India amongst foreign investors," he said. The risks to further FII inflows are political and the monsoons.
"The political scenario may present a risk. Another would be the monsoons, India cannot manage the rains failing twice in a row," said Chokkalingam.