FIIs shift focus from index to stocks

Foreign institutional investors (FIIs) are increasingly betting on individual stocks rather than trading on indices as markets turn volatile on account of global uncertainties.

The total volume in the stock futures and options segment in April was the highest in nearly three years. The current month is also clocking impressive volumes.

According to institutional dealers, large investors believe the index will trade in a narrow range and, hence, potential gains will be limited. Stocks, on the other hand, are expected to offer ample scope for trading gains, they say.

Stock futures are derivatives contracts with individual shares as underlying.

According to data collated by BS Research, open interest position in stock futures and options in April stood at Rs 6.23 lakh crore, the highest since October 2007. Also, data on the market regulator’s website showed that stock futures clocked volume of more than Rs 29,000 crore on most days of the month. In comparison, the average daily stock futures volume in January 2010 was a little over Rs 27,000 crore, with total volume at Rs 5.25 lakh crore.

Derivatives experts attribute the trend to arbitrage opportunities in a number of stocks, which was not the case a few months ago. Marketmen say the ongoing global turmoil and action in the deal space have lead to significant swings in individual stocks.

“The last few months have seen the return of arbitrage opportunities in many stocks, which has led to an increase in volume in stock futures,” says T S Harihar, head, institutional derivatives, ICICI Securities. “If you look at the earlier months of the current year, there were hardly any arbs (arbitrage) in stocks. The rise in stock options is primarily on account of ‘special situations’ arising due to corporate actions like mergers, acquisitions and delisting,” said Harihar.

The turnover in stock options, though much less than stock futures, has been registering steady gains. In April, the monthly open interest volume was nearly Rs 16,976 crore, the highest since November 2009. In the current month, till May 19, the open interest in stock options stood at nearly Rs 15,000 crore.

According to Jitendra Panda, senior vice-president, Motilal Oswal Financial Services, a lot of action in the market has “moved away from the Nifty” to “momentum stocks,” which has led to an increase in volumes of stock futures and options.

“If you look at the last four-five months, markets have behaved in a range-bound manner and action on the Nifty has not been significant,” says Panda. “On the other hand, sectors like cement and pharma saw a lot of stock-specific action, with many momentum stocks outperforming the index. So, funds also moved away from the Nifty to stocks,” he added.

While index derivatives have not seen a significant rise in volumes recently, as compared to stock futures and options, experts believe action in the index space will pick up again as the expected range broadens.

“With the euro-crisis overhang, analysts have been talking of a 500-point range, between 4,800 and 5,300. My view is that a 500-point range provides enough opportunity for investors,” says Harihar.