FIIs, MFs keep fingers crossed over valuation, eye correction

The Nifty may have revisited the 5,000-mark, but there appears to be a lack of euphoria that was seen, when the level was first breached around the same time in 2007. At least the data suggests this.

The share of turnover of foreign institutions and mutual funds in Indian equities
has fallen to around 25-35%, of late, from 50-60% in 2007. The data does not include the share of insurance companies and retail investors.

Though there has been a surge in the number of foreign institutions participating in Indian equities over the last six months, brokers said, of late, they are now waiting on the sidelines for a correction. This is because these investors are conscious about stock valuations, with most stocks doubling since March 9.

What differentiates the current period from that in 2007 is that investors still lack the confidence in the global economy and markets that was seen then. In 2007, most foreign funds invested heavily in emerging markets, including India on borrowed money, several times their capacity. The unwinding of such positions precipitated the market fall starting January 2008.

Brokers said valuations factor in estimated earnings of 2009-10 and even some part of 2010-11, but still they do not expect the recent upsides to recede soon. The reason is the significant money supply sloshing around.

“The past few days’ run-up in the market is largely liquidity-driven. But what is driving this liquidity is optimistic future. We have already seen most of the worst and there is a strong belief that from hereon, fundamentals will only get better,” says the head of a Mumbai-based brokerage.

The upcoming earnings season will be closely watched by investors to get a hint of what is in store in terms of corporate earnings, going forward.

Some in the market feel it would not be reasonable to compare the foreign institutional activity in 2007 and 2009, given that economic conditions are different. While in 2007, the Indian economy was moving at a rapid 8-8.5% growth rate, now it has mellowed to around 6%.