Contrarian investments by FIIs, local players prop up markets

Insurance companies play a key role in keeping things steady.

Contrarian investment styles followed by two categories of institutional investors and support from the insurance sector have seen markets remain relatively steady and not correct to the extent other emerging markets did. Also, institutions have been steadily moving out of small- and mid-cap stocks and taking larger exposure to large-caps.

Since the beginning of the year, the Sensex has slipped by 2.7 per cent, while main indices of China and Brazil have fallen 5.54 per cent and 17.7 per cent fall, respectively.
  

FIIs vs DIIs
Sectors	FIIs+ADR/ GDR (%)	DIIs (%)	FIIs-DIIs (ppts*)
Auto	5.50	5.70	-0.12
Banks/Financials	27.60	18.90	8.67
Capital goods	5.90	13.80	-7.95
Consumers	4.90	9.90	-5.00
Metals	9.40	8.50	0.91
Oil & Gas	4.20	7.70	-3.48
Petrochem	7.50	5.80	1.76
Pharma	3.80	4.30	-0.43
Power	2.60	7.00	-4.38
Real estate	2.80	0.70	2.10
Technology	13.60	5.40	8.25
Telecom	2.90	2.60	0.23
*percentage points                   Source: Capital Line, CLSA  Asia-Pacific Markets

While foreign institutional investors (FIIs) have been investing in banks, metals and real estate stocks, domestic institutional investors (DIIs) such as insurance companies, mutual funds and banks have been preferring capital goods, oil & gas, consumer sectors and power sector stocks. As a change in strategy, both DIIs and FIIs increased their holdings in large-cap stocks in the fourth quarter of 2009-10, as opposed to small- and mid-cap stocks in the previous quarter. “The movements indicate that the institutions are playing it safe,” says a senior executive with an overseas institution.

Overall, in the quarter ended March, FII holdings of BSE 500 stocks increased by 30 basis points to 14.5 per cent. While, DII holding increased by 37 basis points during the period to 11 per cent, courtesy the support of insurance companies. Analysts estimate that insurance companies have been pumping in around Rs 4,500 crore monthly in the Indian equity market, despite the unit-linked insurance (Ulip) issue.

Exchange-traded funds (ETFs) from overseas markets accounted for 20 per cent net FII inflow in the secondary market from the beginning of the year, says a study out by CLSA Asia Pacific Markets. It reckons that ETFs now account for five per cent of the FII holding in India. However, their share has come down from the 34 per cent level in the previous year.

According to experts, the rising risk aversion has led to lower ETF flows, as these funds collect money from retail investors and are sensitive to developments. “They are taking a broader view of the market at the moment rather than going for individual stock picking,” reckons A Balasubramanian, CEO, Birla Sun Life Asset Management. This phenomenon is not restricted to India. Emerging markets, overall, have seen lower ETF investments. Therefore, it has been the domestic insurance companies that have supported the markets from a more severe correction from the beginning of the year.

According to data provided by the Securities and Exchange Board of India, the share of participatory notes in assets under management of FIIs has come down from 38 per cent levels in January 2008 to 15 per cent levels in January 2010. Domestic mutual funds, on the other hand, faced redemption pressure and pulled out around $1.7 billion (Rs 7,650 crore) from the equity market.