“Buy-and-hold strategy’s passé, FIIs profit from regular churn”
Buy-and-hold strategy’s of investing in equities, for long epitomised by value investor Warren Buffet, does not seem to be appealing enough to quite a few foreign fund managers investing in Indian stocks. This is evident from the way in which they have been churning their portfolios during calendar year 2006. ET analyzed the bulk deals made by foreign institutional investors (FIIs) in 2006, and came up with some interesting results.
In at least a couple of dozen stocks, the total value of shares that has changed hands between various Flls have been many times the total free- float market capitalisation of those companies. And if one were to compare this with the value of FII stake in those companies' instead of the total free-float market cap, the churn ratio rises considerably. And these numbers are only for bulk deals. If block deals are added to these figures, the churning ratio would be mum higher. According to Sebi guidelines, trading volumes in single scrip accounting for more than 0.5 % of the equity capital of the company done by any exchange member has to be reported as a bulk deal.” A transaction is said to be a block deal if a minimum quantity of 5 lakh shares or minimum value of Rs 5 crore is executed through a single transaction between 9.55 am to 10.30 am.”
With the Indian equity market at a crucial juncture, market watchers feel portfolio churning by foreign funds could rise further.
Jon Thorn, MD, India Capital Fund managing Indian equities worth more than $250 million, based in Hong Kong says, "With Indian equity markets nearly valued in the short term, volatility will be on the higher side."
The analysis shows that in stocks where the total value of bulk deals traded in one year exceeded the free-float market capitalisation of the stock at the end of December 2006, the prices have appreciated significantly. For example, Educomp Solutions, Sadbhav Engineering, Atlanta, Tulip IT, Action Construction, Nitco Tiles, BL Kashyap, Indo Tech Transformers, Voltamp, et al. These stocks were the ones where all the bulk deals in the year amounted to over Rs 500 crore in value. The same was true for many stocks where the total value of bulk deals, was very significant but did not exceed the free-float market cap of the stock at the end of the year. For instance, the value of FIT bulk deals in Reliance Industries was around Rs 21,000 crore in 2006, less than a fourth of the company's market cap in end-December. However, there were exceptions like Shyam Telecom, IL&FS and Pyramid Retail where the stock price has declined despite high level of churning.
So what does this trend indicate? One obvious fact is FIIs are keen to take some cash off the table when it is available.
Not surprising, considering that even as the Indian equity market continued to be on an upward spiral for the last couple of years, it has always looked expensive when compared to other emerging markets. The second reason could be the rising influx of short-term investors, especially hedge funds, into the market. Currently, there are 1,059 FIIs registered with the capital market regulator Sebi.
In at least a couple of dozen stocks, the total value of shares that has changed hands between various Flls have been many times the total free- float market capitalisation of those companies. And if one were to compare this with the value of FII stake in those companies' instead of the total free-float market cap, the churn ratio rises considerably. And these numbers are only for bulk deals. If block deals are added to these figures, the churning ratio would be mum higher. According to Sebi guidelines, trading volumes in single scrip accounting for more than 0.5 % of the equity capital of the company done by any exchange member has to be reported as a bulk deal.” A transaction is said to be a block deal if a minimum quantity of 5 lakh shares or minimum value of Rs 5 crore is executed through a single transaction between 9.55 am to 10.30 am.”
With the Indian equity market at a crucial juncture, market watchers feel portfolio churning by foreign funds could rise further.
Jon Thorn, MD, India Capital Fund managing Indian equities worth more than $250 million, based in Hong Kong says, "With Indian equity markets nearly valued in the short term, volatility will be on the higher side."
The analysis shows that in stocks where the total value of bulk deals traded in one year exceeded the free-float market capitalisation of the stock at the end of December 2006, the prices have appreciated significantly. For example, Educomp Solutions, Sadbhav Engineering, Atlanta, Tulip IT, Action Construction, Nitco Tiles, BL Kashyap, Indo Tech Transformers, Voltamp, et al. These stocks were the ones where all the bulk deals in the year amounted to over Rs 500 crore in value. The same was true for many stocks where the total value of bulk deals, was very significant but did not exceed the free-float market cap of the stock at the end of the year. For instance, the value of FIT bulk deals in Reliance Industries was around Rs 21,000 crore in 2006, less than a fourth of the company's market cap in end-December. However, there were exceptions like Shyam Telecom, IL&FS and Pyramid Retail where the stock price has declined despite high level of churning.
So what does this trend indicate? One obvious fact is FIIs are keen to take some cash off the table when it is available.
Not surprising, considering that even as the Indian equity market continued to be on an upward spiral for the last couple of years, it has always looked expensive when compared to other emerging markets. The second reason could be the rising influx of short-term investors, especially hedge funds, into the market. Currently, there are 1,059 FIIs registered with the capital market regulator Sebi.
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