The Hindu Business Line : Profit-booking tones down FII effect

OVER the past 25 trading sessions, stock prices have not moved up across-the-board in the relentless manner as they did between June and mid-October. Gains have not been of a similar magnitude either. Profit-booking appears to be more pronounced as also a shift away from large-cap stocks.

The bullish undertone, however, remains. A correction, such as the one that is happening now, can only be healthy for the market.

The bout of profit-booking comes despite inflows of $1.3 billion from foreign institutional investors (FIIs) in October. This accounts for 29 per cent of the funds brought in by them since June.

So far, FII inflows into equities this year have crossed $5 billion. The trends since mid-October suggest that an increasingly higher quantum of FII funds may be needed to push the markets up sizeably.

Between June and mid-October, the rally in stock prices encompassed a swathe of stocks cutting across sectors and market cap, driven by heavy FII inflows of $3 billion.

Stock indices gained between 51 per cent and 62 per cent, depending upon the category of stocks they track. In this backdrop, the shift in trading patterns since mid-October is significant.

Select large-cap stocks such as Grasim, Mahindra and Mahindra, Indian Oil, Maruti and Hindalco appear to be attracting fresh funds. But the Nifty is up just 2.7 per cent in this period. Selling pressure is evident on quite a few Nifty constituents. The S&P CNX 500 is up by 3.8 per cent largely due to the firm trends in stocks such as Indian Oil, ONGC, HPCL and Wipro, to name a few, and the 7 per cent increase in mid-cap stocks.

Trading volumes in the spot market continue to be high with average daily turnover upwards of Rs 6,500 crore. Derivative volumes on a weekly basis have spurted beyond Rs 53,000 crore.

These numbers show that there is no significant scaling back in trading activity. This coupled with the modest rise in stock prices points to sizeable profit booking, which appears to be more pronounced compared to the preceding six months.

The spurt in derivative market volumes also suggests that increasingly views in indices and large-cap stocks are being taken through option and futures contracts even as in-the-money spot positions are converted into concrete gains.

FIIs too appear to have stepped up their selling levels. FII sales as a proportion of purchases, which used to be about 85 per cent, declined steadily since August. IT slipped to 66 per cent in September and less than 50 per cent in the first fortnight of October, the lowest level in five years. Since then, this proportion has risen by 10 percentage points pointing to more selling with a view to take profits.

Domestic mutual funds have been on a selling mode. But their scale of activity is modest in the overall context. Big-ticket domestic investors and market players (large brokerages which invest and trade heavily) appear to have been at the forefront of the profit booking exercise.

Traders may also be locking into profits on a larger part of their exposures than holding them in anticipation of further gains.

For investors, these trends mean that they have to look at profit-booking in a disciplined and phased manner.

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