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Srividhya Sivakumar

Stock markets the world over have been careening from one crisis to another, and so has the Indian market. Despite strong fundamentals, the equity market has given way to profit-booking by foreign institutional investors. The manner in which events unfolded during this correction brings to fore the importance of tracking investment inflows from the foreign institutional investors (FIIs).

Though data on overall FII transactions from SEBI can be a useful guide, investors may have benefited more had they kept track of FII investments that are routed through the bulk deals route, on both the exchanges. Transactions through bulk deals (because they involve a significant stake in a company changing hands) tend to be less speculative than other FII transactions that aren’t individually reported. This makes it more imperative for investors to use the bulk deals trail to time their investments.

Business Line sifted through this data to find out which FII was buying when the market was down, which one sold on market uptrends and, most importantly, what cues could be discerned from FII investment trends through bulk deals. For the study, bulk deals on both the NSE and the BSE by prominent FIIs and their sub-accounts over the last year were considered. These were then compared to the market-wide FII investment data that is made available by SEBI. Here are a few takes.

FII investment in Indian stock exchanges reached its zenith in 2007, with net inflows touching Rs 71,400 crore. While the trend was similar in FII investments disclosed through bulk deals, a comparison of the monthly pattern in net inflows in both categories threw up many interesting facets.

For most of the year, the net investment pattern of both the categories appeared in sync. Both saw net outflows during March 2007, August 2007 and January 2008, months when stocks were in correction mode. However, FII activity in bulk deals diverged significantly from the overall trends in November and December 2007.

The overall FII investment in November was negative, even as bulk deals continued to show net buying. Outflows from the market as a whole may be explained as an after effect of the P-Note regulation introduced in October. The net inflow of funds through bulk deals suggests that long-term FII money continued to flow in during November.

However, the tide turned in December, with bulk deals data showing more sells even as market-wide FII data continued to paint a positive picture. This trend assumes greater significance as the market came under selling pressure in January 2008.

Did the activity in bulk deals signal pre-emptive profit-booking by some institutions? It is easy to say so with the benefit of hindsight.

However, bulk deal activity does seem to be an advance indicator of market trends, given that, more often than not, bulk deal investments by FIIs moderated in every month preceding a correction period in the market — whether it was March 2007, August 2007 or January 2008. October 2007 saw the highest net inflow of FII money through bulk deals, while July 2007 saw the highest overall FII inflow. This makes the case for following the money-trail through bulk deals stronger, as the market rose sharply in November and corrected in August.

The overall level of activity in bulk deals also seems to be an important cue to market direction. Reported bulk deals by FIIs accounted for about 90 per cent of the net FII inflow in January 2007; but FII investments through bulk deals dropped to less than a tenth of the total inflow in February 2007. This moderation in inflows could have been anticipatory of the correction that gripped the market in March 2007.

A similar cooling of bulk deal activity was also visible in July 2007, a month before the sub-prime crisis affected the markets. The conclusion is strengthened as the same trend surfaced again in December 2007, a month before the deep January correction. December 2007 saw a net outflow of funds in disclosed bulk deals vis-À-vis a net inflow shown by SEBI data.

This divergence in investment was noticed again in February 2008; despite a net inflow of the overall FII money, bulk deals continued to tilt in favour of ‘sells’.

These trends suggest that a correction in the markets was usually preceded by a moderation in FII investments through bulk deals. Following cues from the trail left by FIIs through their bulk deals in combination with their market-wide investments could have served as better guide on the market direction.

Apart from overall trends in inflows and outflows, strategies followed by individual FIIs while putting through bulk deals also throw up quite a few interesting trends. Here are a few:

Among the FII biggies, Morgan Stanley, Goldman Sachs and Merrill Lynch appear to be the ones that remained most consistently bullish on the Indian markets through 2007.

These FIIs remained in the ‘buy’ mode (in bulk deals) all through the two corrections in March 2007 and August 2007.

However, it bears watching that these three institutions have turned net sellers in bulk deals recently in December and January 2008. This holds importance since the market recovered quickly from the first two corrective phases, but is yet to recoup its losses from the January 2008 correction.

In terms of net buyers during the year 2007, while Deutsche Securities, Merrill Lynch and Morgan Stanley topped the list, CLSA, Barclays and UBS were the highest net sellers through the bulk deals route.

The year 2008 so far, has only seen a net outflow of funds through bulk deals in all the three months.

This is mostly in line with net market-wide FII investments, which also saw huge outflows. The only deviation was February, when despite a net inflow of FII investments, bulk deals reported an outflow.

While there is no telling when the current market meltdown will run its course, it can be safely assumed that a lot will depend on the renewal of buying interest from FIIs. Considering the important cues that investment pattern of FIIs in the bulk deals segment hold, it may be best for investors to track the flow of funds under both categories.

Transactions through bulk deals (because they involve a significant stake in a company changing hands) tend to be less speculative than other FII transactions that aren’t individually reported. This makes it more imperative for investors to use the bulk deals trail to time their investments.

More often than not, investors tend to limit their learning from the bulk deals data to cues on sector and stock trends. These inputs can also be extended to read the FII fund-flow patterns in market.

While, one cannot construe any inflow or outflow of funds by a particular FII as that FII turning bullish or bearish (since these investments can be proprietary and on behalf of clients), the bunching up of cumulative investments by FIIs through bulk deals over regular time intervals can provide a better guidance on the direction of the market.

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