Market experts say that FIIs have been caught off-guard on their exposures to companies with high-leverage and those facing cyclical headwinds.
Foreign institutional investors (FIIs) have had a mixed year, getting negative returns in two-thirds of the stocks in which they raised stake, over the first nine months of calendar year 2019.
According to an analysis of data from Capitaline, of the 423 listed firms in which FIIs raised stake, 278 had delivered negative year-to-date (YTD) returns.
Market experts say that FIIs have been caught off-guard on their exposures to companies with high-leverage and those facing cyclical headwinds.
“FIIs had placed bets on stocks which they felt would lead the broader market rally, on the back of an economic revival. However, this investment theory has not held in the current market scenario,” said a fund manager.
“FIIs that have taken higher exposure to mid- and small-cap stocks have had to bear the brunt of volatility in the broader markets,” said Deepak Jasani, head (retail research) at HDFC Securities.
Data showed that in the mid- and small-cap segments, trades in 66 stocks yielded negative returns YTD for FIIs.
Graphite manufacturers HEG (down 69 per cent) and Graphite India (down 59 per cent) topped the list, in which FIIs raised stake by 148 basis points (bps) and 238 bps over the first nine months of CY19.
PNB Housing was another stock in which FII holdings rose 353 bps even as the share price eroded by 53 per cent.
The broader markets have failed to participate in the rally.
Even as benchmark indices Sensex and Nifty have yielded returns of 15 per cent and 12 per cent, respectively, mid- and small-cap indices have shed 4 per cent and 8.9 per cent YTD, respectively.
“Some of these mid- and small-cap stocks looked attractive at the beginning of the year due to beaten-down valuations. However, investors were caught wrong-footed in some of these names, given these companies’ fundamentals deteriorated further,” the fund manager said.
FIIs have also had some difficult investments in the large-cap space.
The share price of Essel group company Zee Entertainment has eroded 41 per cent YTD.
FIIs had raised their stake by 373 bps in this counter.
Vodafone Idea is another case, in which the stock has declined 71 per cent, while FII holding has risen by 148 bps.
Experts expect FII flows to continue in the domestic markets.
“Even though Indian markets are not very cheap in the emerging market space, FIIs don’t want to be left out when the momentum picks up,” Jasani added.
On a YTD basis, FIIs have been buyers to the tune of Rs 96,414 crore in equities, which is in stark contrast to last year’s Rs 33,000 crore of net selling.
