Stocks with high foreign institutional investment are turning out to be hot for retail investors. Though an immediate threat of US Fed tapering has faded away, the fact that it will indeed cut its bond-buying programme eventually makes these stocks vulnerable. Analysts think many stocks face the risk of drastic de-rating when foreign institutional investors (FIIs) retreat.
Now the question is when the Fed tapering could happen. A decision could come after January, according to Rajesh Cheruvu, chief investment officer, RBS Private Banking India.
Among stocks with high FII holding, those that saw a huge upsurge on the back of hot money from short-term funds would be particularly vulnerable, while companies with strong fundamentals that are backed by long-holding investors, such as pension funds, have relatively lower risk, according to analysts.
“FII investment is a boon and a bane. FIIs buy into shares with strong fundamentals and growth potential. So, the stocks get re-rated when they buy into them. On the flip side, if they tend to be negative on the country, sectors or stocks, the impact would be manifold because of their large holdings,” said Sonam Udasi, senior vice-president, IDBI Capital.
“FIIs generally take calls on countries or sectors and invest through the ETF (exchange-traded fund) route. Direct calls on stocks are lower, which means a large portion of FII money can unwind in a quick fashion. Retail investors need to be cautious,” he added.
Stocks of banking, financial services, information technology, pharma and FMCG (fast-moving consumer goods) companies have seen huge FII inflows in the past two-three years. “The key is what kind of FIIs have invested in these stocks,” he said.
There should be greater transparency in terms of shareholding pattern of companies that would help retail investors identify exposure of stocks to FIIs, said Deven Choksey, managing director, KR Choksey Securities. “There should be further classification such as short-term hedge funds, long-holding funds and ETFs,” he added.