FIIs shift a bit from beaten path

Mumbai, Nov. 10: Foreign investors have shovelled more than $16 billion into the domestic equity markets so far this calendar year, but their investment preferences have not shown much of a change.

According to market circles and brokerages, foreign institutional investors (FIIs) continue to remain upbeat on IT services and private banks, apart from defensives such as pharmaceutical companies.

They had lapped up IT, auto and pharma stocks during the quarter ended September, following the depreciation in the rupee.

However, there are indications that they may have started looking at cyclicals such as commodity and metal stocks.

“In the September quarter, FII portfolios changed towards the exporters of weak rupee — energy, auto, IT services and healthcare — but stayed concentrated. Sector preferences are likely to have changed again in October, with $3 billion of net buying likely to be focused on the cyclicals, though a part of it is likely to still be in IT, a sector which did well around results in the first half of the month,” a note from Credit Suisse said.

The brokerage added that the FII portfolio during the September quarter was concentrated with top 50 stocks accounting for 77 per cent of their total holdings.

Domestic stock indices recently hit record highs, powered by ample liquidity that came from the ongoing asset purchase programme of the US Federal Reserve.

However, critics pointed out that this rally was not broad-based and was restricted to few sectors that included FMCG, IT services, pharmaceuticals and banks.

“Those favourites such as IT, pharma and private sector banks still remain and they are unlikely to change. However, recent indications are that the foreign investors may have started looking at some of the other sectors such as cyclicals or mid-cap counters. But, it is early days as yet,” a senior analyst with a foreign brokerage said.

Experts point out that attractive valuation and the possibility of a turnaround in the domestic economy over the next few months could be the factors drawing investors into sectors such as capital goods, metals or infrastructure.

According to an analysis by Motilal Oswal Securities, cyclicals are at a huge discount of their historical price to book (PB) average.

PB is a ratio used to compare a company’s current market price to its book value.

The brokerage adds that this sector is trading at a discount of around 50 per cent to its historical PB average.

As of November 8, the number of registered FIIs in the country stood at 1,745 and the total number of sub-accounts at 6,379.