FII and its Effects on the Indian Markets

Foreign Institutional Investors play a big role in the Indian Securities markets , with the sheer volume of money at play their arrival or departure can make the markets either move or crumble onto their own. While we haven't done any co-relation analysis, we might put up that data pretty soon. We do not believe any mathematical analysis of such sort plays any significant role, and can be relied upon while trading , we so believe a rough estimate about the flow of money especially FII and DII ( Domestic Institutional Investors) do impact the markets from a price view as well as a know how of and about the same gives an extra sense about the pulse of the market. While it is hard to say what is happening or what could happen in the market by just looking at one parameter, mixed all together they give a clear view about the market and expectations.

Attached together is the data set for FII obtained from RBI , and a graph showing the Y-O-Y change as well as total change in terms of money invested by the FII in the Indian Equity Markets. By the end of June '11 FII had a net investment of 3.62 lac crores or $67.33 billion assuming an exchange rate of  $1= 50 INR. FII has increased approximately at an annual compounded rate of 28 % since 93/94 till April 2010 last year. A substantial increase over a 17 year time span.

April-05

Trading and Technicals ( India Specific )

As we have indicated earlier in our posts, our emphasis shall be on emerging markets and on ways by which investor/traders can learn improve their returns in the market. 

Now while we do know, and wish our readers to know as well that making money in the market is not an easy task a scientific approach towards securities  followed with utmost discipline over a period of time promises decent return as compared to the markets. 

In this blog we take a different path as compared to our usual posts, and as a disclaimer want readers to know that while all can invest intelligently trading is not everybody's cup of tea.

Before we delve ourselves into the world of trading, we need to understand what trading is, and how is it different from our usual approach.( i.e investing)

Trading: Trading is noting else but buying (selling) a stock, bond, derivative with the hope of selling(buying) it back later at a higher(lower) price.Whereas in investment the underlying play a significant role as to the decisions leading upto investment, trading is solely based on factors including the psychology and emotions of markets as well as people in the market.

While many may believe the process akin to gambling , some scientific approach to it can improve speculation and speculators profit.Trading in a simpler language is nothing less than intelligent speculating. Which requires one to do his/her work and make decisions accordingly. 

Deciding onto peoples emotions is a hard guess, but interpretation of their actions when and as seen in the markets is a trading advantage.What are these trading advantages or emotional tests a trader shall or does use to get himself ahead of the market ? 

While there are many tools out there in the technical space we deal with a few that we think are highly important and affect the Indian Markets. We might and do reserve the right to add/change/delete or modify these variables depending on how they span out in the markets , and or if they still remain valid from a traders perspective.

Now without much of a wait let us just get to a few important trading parameters : 

1) Margin Trading 

2) FII/DII Trading within the markets

3) NSE Open interest

4) Advances Declines

5) Volumes / Market Capitalization 

6) PE Ratios ( Change in Earnings , Prices and overall Change ) 

7) Insiders buying/selling

8) Pledged and Un-pledged Shares
9) Cash levels at Mutual Funds , and Mutual Fund Activity

We shall look at each one of them individually and learn what they are and how they can aid a trader in his or her trading on a day to day basis. 

For the convenience of our readers , we shall do our best to keep the data updated on a daily basis as well as go back to the maximum date we can so that it helps in the analysis of individual securities at hand.

Valuation Concern : On Going & Liquidation

Valuation has been a really important parameter to arrive at the conclusion if any security/company is selling for cheap in the open market or not. But the decision about how to arrive at valuation is a pretty important matter as well.

There are two ways of Valuing a Company , i.e is the company to be valued as a Going Concern or Liquidation Basis ? 

The reason why we mention Going Concern and Liquidation decides how does one value a business. One may ask what difference is there , and why such a difference in terms of valuation for business.The answer lies in the fact about capitalism, and the constant and dynamic change in business environment where either new industries are introduced from nowhere ( e.g -technology), or the destruction of other industries ( due to many reasons , outsourcing, technological change has made the industry obsolete,smaller commodity companies cannot keep up with changing business environment). 

While many industries do not face the problem of obsolesce due to the products they offer (e.g chewing gum industry, food industry (taste might change),shaving industry,soft drink), certainly a few do.For the former class measuring the companies by their earnings or as a going concern is a much better yardstick for valuation , and for the latter a liquidation valuation does make a lot more sense. 

That said, there are times when one can find companies valued fairly on an earnings or a going concern, but substantially cheap on a liquidation basis. While one might guess that the best way to make money would be to just liquidate the business , the other reason for such undervaluation is that assets operating or non operating are carried on the Balance Sheet at Historical Cost which happens to be really low, and now predictive of what it would be in today's market. 

If the asset is non-operating we have two businesses combined in one entity, one is an ongoing business while the other a non-operating business which can be sold and a one time substantial gain can be realized by the shareholders.

If the asset is operating, and sells for relatively cheap much more care and attention should be put on the earnings and the Return on Assets (ROA) and Return on Equity (ROE) should be considered accordingly as this might result into higher ROA & ROE with comparable business, and a false undervaluation for the same.

So it is really necessary and important to know what the business is and what part of the growth cycle( either be mature or declining as well) it operates into to decide what valuation methodology to be used.

Commercial Banking , Credit Rating & Emerging Countries

With the problems in the Euro Crisis , and the spread of the contagion to other AAA rates countries in the Euro region, one thing comes to mind. Who gets really affected by the change in a country's credit rating ? Well you guessed it right BANKS. 

With the recent downgrades in the credit ratings of countries , the biggest impact that has been observed is a subsequent downgrade in the credit ratings of the banks in the same country. Which explains a really important fact. A Banks credit rating is highly dependant on its home country's ratings. 

Why would credit ratings be important to a bank ? Obvious reason is a better credit ratings, leads to lesser interest cost and higher earnings. But it is not as simple as it seems in the world of Banking. Lending money is a commodity business, the only way a competitor can get advantage over the other is by producing (i.e getting money) at a cheaper rates, given Net Interest Margin ( Net Interest Earned- Net Interest Expense) remains the same for each bank.

Now to compete at a Global Scale the only banks that can be really competitive are the banks with a AAA credit rating , which has a lot to do with the credit rating of the Country. Recent Financial and Euro region crisis, has had an impact on many of these things and made developed banks if not now in the longer term less competitive at the global scale if not fully dysfunctional in some extreme cases ( Banks in Greece, Portugal , Spain and Italy)

How does credit ratings relate to Emerging Markets ? Much of the last decade has seen an improvement in any of the emerging markets, especially in growth , their debt servicing capacity, Debt to GDP ratio, exports etc. 

In light of all these positive factors , and a simultaneous deterioration in the developed worlds credit rating opens up a significant opportunity for the developing markets and countries around the world that has a high possibility of leading to improvements in credit ratings. 

What impact can this have for the Banks in Developing Markets one may ask ? For one it makes them competitive at a Global Scale , Increase in business and increase in Balance sheets as well as increase in earnings. 

In this dynamic world, many opportunities do exist for the emerging markets. It is upto them to prove and grab their opportunity in this changed world.But, if things work right, many countries , and banks would and can benefit from a better credit ratings on a global level.