US Federal Chairman Ben Bernanke, last week, had decided not to start shutting the liquidity tap giving the markets worldwide a surprise boost. Indian stock markets also rejoiced with strong gains. The $85-billion bond buying programme will continue to help capital markets across the world stay afloat thanks to the liquidity quotient.
But will that help the Indian stock markets? Yes and no. Yes, because it may help the Indian large-caps and shares where foreign institutional investors’ have high stake to remain relatively stable in the short to medium term, despite weak domestic macro-economic condition.
And no because, the Indian equity markets currently lack the depth to attract voluminous fund flow and sustain the momentum in the long term. Even if foreigners wish to invest in India, their options are limited. In most of the stocks, their holding has almost reached the threshold level.
According to the latest shareholding pattern available, foreign investors control 48 per cent of market’s free-float. A Citigroup report says that FIIs holding has crossed $220 billion. The FII ownership in 30 Sensex companies increased to 18.35 per cent in June 2013 from 16.36 per cent a year ago. This is also the highest level of FII holding in the Sensex in the past five years.
They have pumped in about $66 billion in the last four calendar years including 2013 but that hardly moved the Sensex and Nifty. On the other hand, despite heavy fund flow, the BSE mid- and small-cap tumbled about 40 per cent and 55 per cent, respectively, during the period.
When the floodgates were thrown open to foreign investors on September 14, 1992, they had various options. The BSE S&P Sensex almost surged 10 times since then, thanks to the depth in the market.
Information technology and telecommunications sectors, sunrise sectors at that time, had attracted a bulk of their flow. The attraction was so much so that Infosys and Wipro had launched American Depository Receipts too in the US equity markets. Currently, the BSE IT and BSE TECk indices command about a third of the Bombay Stock Exchange’s total market capitalisation.
Emergence of private sector banks further augmented investors’ confidence in the Indian markets. Companies from infrastructure and realty segments too played their part in attracting funds. Both private and public sector companies such as TCS, Reliance Power, Coal India and Cairn India tapped Indian markets with big initial public offerings.
But now the scenario has changed, as FII investments are at an all-time peak.
With the Indian markets having integrated strongly with global capital markets, the portfolio of investible companies has to be expanded to attract large such flows. After Coal India’s public issue in 2010, the Indian stock markets and investors are craving for big companies to tap markets. Coal India had raised about Rs 15,000 crore in 2010.
Sunrise sectors
Indian markets not only need big companies to tap markets, but also stocks from sustainable sunrise sectors for investors. At present, sectors such as renewable energy (wind and solar power), retail, healthcare and agriculture (seed) hold promise but are facing headwinds. So, which one is going to be the next big leader will be a million dollar question.
Till such time, the flow of hot money will continue to make Indian stock markets more volatile.