Institutional view 2007

Updated: Dec 31 2006, 05:47am hrs
At the start of 2007, the institutional players are expected to maintain their attention on emerging markets. Over a period of last three years, the foreign institutional investors (FII) and domestic institutional investors have dominated the Indian equity markets. FIIs not only brought cheap funds to Indian markets but also fuelled the Indian stock markets along with other emerging markets.

A recent report collated by Emerging Portfolio Fund Research, an organization that tracks global fund flow suggests, Emerging markets equity funds appear almost certain to post record inflows for the second year running after investors pumped another $1.3 billion into them during the third week of December, pushing net year-to-date flows 9% beyond last years $20.3 billion total.

The report adds that most of the second half of the current year has seen China being the favoured destination. The trend continues in the year end. Asia ex-Japan Funds posted net inflows of $1.05 billion, for the week before Christmas vacations set in. This, EPFR reckons, is their best week since early February.

While China, Greater China (China, HK, Taiwan) and Hong Kong Equity Funds accounted for an astounding 60% of all emerging markets inflows. This time around, most of the monies are being pulled out from US Equity Funds, which took another battering.

Indian markets have a special status among the FIIs due to the structural changes taking place in India and the domestic consumption story.

Institutional players are recommending the Indian equity markets with caution. Expectations are at the lower end and most of them agree on the stretched valuations. At the current levels, the positives are said to be factored in and there is limited upside from these levels.

Some of the institutional players are maintaining their defensive stand on Indian market, with clear focus on earnings momentum. The recommendation lists in such cases are more tilted towards the large cap stocks having stable earnings growth.

Commodity companies are almost vanished from most of these lists. The domestic consumptions theme and knowledge businesses in India are revealed preferred by most of the institutional players. Also companies having exposure to the lifestyle segment in India are on the buying list of some of the FIIs.

Post the correction, there is a view that the mid cap and non-front run companies are available at lucrative valuations. Mid cap stocks in knowledge businesses like information technology and IT enabled services have made to the buying list to some of the institutional players. However barring a few most of the FIIs are sceptical about mid-cap stocks.

In a nutshell, FIIs are focussing on only two factors, sustained earnings growth and re-rating of the Indian stocks arising out of such earnings growth.

However, all these factors are being viewed in light of rising inflation and interest rates. Things are not the same as they looked like.