Foreign Institutional Investors (FIIs) were net buyers in Indian markets for about Rs 2.7 trillion in FY21 and raised stake consistently in the last four quarters largely in stocks from the small & midcap space.
Out of 32 companies in which FIIs raised stake consistently, 11 of them have a market capitalisation of more than Rs 20,000 crore, and the rest belong to the small & midcap space.
17 companies with a market cap of over 1000 crore or more than doubled investors’ wealth in the last one year, data from AceEquity showed. Stocks that rose 100-1000% include names like KEC International, Bharat Forge, Garware Technical, Gujarat Ambuja, Elgi Equipments, Tube Investments, and Intellect Design among others.
History suggests that small and midcap companies’ results have a clear positive correlation with economic growth. The economic growth has increased faster than predicted, although a rise in COVID cases in March-April could hit the FY22 growth rate.
In the last three years, the Nifty Midcap 100 and Nifty Smallcap 100 have underperformed the Nifty. However, in FY21 the Nifty index returns increased by more than 78 percent, while mid and small-cap index returns increased by more than 100 percent.
“Vaccination will be the next key driver of economic growth at this point. FIIs took advantage of last year’s market turmoil to choose low-cost small and midcap stocks with high growth potential,” Rohit Gadia, CIO at CapitalVia Global Research Limited said.
“FIIs have begun to invest by focusing on factors such as the nature of the business, the quality of management, and sound financials, which have resulted in triple-digit returns in a short period,” he said.
Gadia further added that companies like Bajaj Electricals, Larsen & Toubro InfoTech Ltd, Cummins India Ltd, Bharat Forge Ltd, and MindTree Ltd are very well-known names in the market and investors may like to add these stocks into their portfolio.
What should investors do?
The big question in front of investors is what should be the next step in case someone is holding these stocks in their portfolio.
While filtering stocks by looking at companies where FIIs are invested is a good strategy to shortlist stocks, experts advised investors to do their own research before pressing the buy or sell button.
“Investors can gradually consider booking profits through a staggered approach. Some of the stocks have run up to the higher end of the valuations. Currently, many growth and value stocks are available at reasonable valuations and a switch to them can be considered by such investors who are sitting on these huge returns,” Divam Sharma, Co-founder at Green Portfolio Services told Moneycontrol.
“We continue to hold Polyplex and Tube investments in our portfolios. There is a lot of evolution in many businesses with IT being a big beneficiary, ethanol blending increase benefitting sugar players, infrastructure focus and order book ramp-up looking good for the sector,” he said.
FII inflows and outflows impact markets and returns in the near term, and are worth tracking to assess sectoral opportunities but one should not ignore valuations.
A deluge of liquidity post the pandemic and low to negative interest rates in the global economies has led to growing FII interest in Indian stocks.
With a sharp post-COVID rally across market, seasoned FIIs are getting the confidence to consider stocks beyond large and liquid stocks, and investing in stocks that have a certain size or liquidity, suggest experts.
“I believe investors should not follow momentum or mimic FII activity. FII is hot money. Retail investors could be too late to earn the gains or limit the losses by following FII activity,” Richa Agarwal- Senior Research Analyst at Equitymaster.
“Further, there are several factors and compulsions (institutional imperatives) including the large corpus, that determine FII flows, that don’t apply to individual/retail investors. Retail investors, as such, are better off playing to their advantage rather than following FIIs,” she added.
Agarwal added that retail investors should invest on the basis of their own financial goals and understanding of businesses and margin of safety. Especially in these times when valuations already seem to be on the higher side.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
