WHEN FIIs SELLOFF , WHAT DO YOU DO?

By Ruma Dubey

The FIIs are selling!! The FIIs are selling!!!

That seems to be the chant of most panic struck traders on Dalal Street.

And yes, they are indeed selling – the entire month of November has seen FIIs only selling, except for 7^th and 8^th when there was a net purchase. But the selling caught momentum from 9^th November – the day on which Trump won the Presidential elections and Modi’s demonization took off. The total net sell off by FIIs in November by FIIs – from 1^st to 18^th stands at Rs.11,986 crore and from 9^th till 18^th, it is at Rs.10,543 crore. This means 88% of the sell off by FIIs in the month of November has happened after demonetization and Trump win. Is that the reason why FIIs are selling?

Essentially yes. But the sell off is not happening in India alone, they are selling in almost all emerging markets, not just equities but also currencies. Central banks last week in Malaysia and Indonesia intervened to support their currencies, while foreign investors have slashed holdings of sovereign EM bonds perceived as most risky.

It is the Trump factor more than demonetization which is playing foul. Trump will take oath in January and all will be watching out for the kind of ministers he selects. Given his protectionist stance, no one wants to take a chance – one does not know how much of his campaign rhetoric will get translated into reality.

The perception is that Trump will spur growth within USA through fiscal stimulus, infra spending and reflationary policies. Inflation is expected to take off and this has already sent the benchmark US 10-year Treasury yields and dollar into a tizzy. There are expectations that there will be a tighter monetary policy and most have marked a sure shot rate hike in December Fed meet.

This is a time when Trump victory has led to FIIs re-evaluating their emerging market thesis and this is what we are seeing played out in the markets. Investors are concerned about the future prospects of emerging markets – the worry is that a strong US growth rate will have a smaller impact than previously on emerging market growth under the protectionist president.

There is fear that Trump will announce anti-trade measures, doing away with trade agreements and this will prove to be inflationary. They have coined something known as “Trump risk premium”, explaining the run on the currencies of the emerging markets.

Having said all this, the fact is that India remains a positive destination for most FIIs as its long term story is intact. In the short term, yes, there is concern that demonetization will have an impact on India Inc and it is bound to have. We are sure to see the pain in Q3 and most part of Q4 too. This is also expected to shave off 0.5% from the GDP of current fiscal. The fall in demand, trucks stranded, vegetables and grains piling up; all this will have an impact. But this is not the reason why FIIs are selling – it is just that it has combined with Trump factors.

Currently the selling by FIIs looks indiscriminate but the truth is that in emerging markets like India, where strong domestic growth profile remains intact and there is clear evidence of structural reform momentum, surely the India story is still hot!

In fact HSBC put out its report saying that foreign appetite for emerging markets might return to markets with positive local factors, such as India, Indonesia, Brazil and Russia, though demand may take a hit in the near term.

Do we follow the FIIs? You and they are in two completely different situations and would be foolish to merely do what they do. FIIs have peer pressures to follow their herd but we do not. Warren Buffett has often talked about the “institutional imperative” where like a herd, investors follow each other, even if they know it is not logical as they do not want to “miss out”; not having the guts to take contrarian calls.

So what do investors do in this current volatile scenario? One does not know, at this point of time the amount of pain or ‘sell off’ pending in the system. If you have limited cash, best to sit on it till the situation abates. But if you have cash and do not look at day-to-day capital preservation, then its best to identify very sound companies and invest at every decline- like a SIP in select stocks. Build a strong portfolio for the long term.