FII investments reach all-time high in September 2010

Foreign Institutional Investors are betting heavily on the India growth story. By the end of September, 2010, the FII investment in calendar year 2010 stood at US $ 28.5 bn, out of which US $ 18.4 bn were in equity while US $ 10.1 bn were in debt instruments.

Figure 1: FII Investments in Equity and Debt (Source: SEBI)

During 2010 the cumulative investments by FIIs in India, has already crossed the highest investments India has ever received in any calendar year. FIIs are the driving force in the market. During the month of September, Nifty has risen by 11.62%.

Figure 2: Total FII Investments (Source: SEBI)

2008 was the only year in which there was a net FII outflow. Inflows rebounded during 2009, almost reaching the 2007 levels. Inflows in 2010 are already 50% more than that received in the whole of 2009. The cap on FII investment in government & corporate debt was recently increased from US$ 20bn to US$ 30bn. A hike in the investment limit was necessary, as FIIs have already reached close to the existing limit of US$ 5bn in government securities & US$ 15bn in corporate debt. Net FII inflow into the debt market has grown over eight times from a little over US$ 1bn in 2009 to a more than US$ 10bn during the first nine months of this year. 

At the current rate FIIs inflows are on track to exceed US$ 40bn by the end of 2010.

BSE Sensex Falls Below 10000

The stock market witnessed a sell-off on Friday with the BSE Sensex closing below the 10000 point level for the first time since July 24, 2006. It took 484 sessions for the Sensex to climb from 10000 to its all-time high of 21207. However, in just 191 sessions all the gains of the last 2 years were erased.

What can be expected going forward? Is there any respite in sight? During times like these, it helps to look back at previous bear-markets. As they say, those who don't learn from history are destined to repeat it.

Analysis of previous bear-markets suggests that bear-markets take a minimum of 12-18 months to complete. Measured from January 2008, we are just in the 10th month. So, it will be atleast 6 months before stocks start recovering. I guess the price-wise damage is nearing an end. Historically markets bottom-out at 9-10 forward PE multiples. Considering 2009 March Sensex EPS estimate of 900-950, we are near the bottom.

Investors(both old and new) should use the next 6-9 months to build a portfolio of stocks which they should be prepared to hold for 2 years at least. This strategy is sure to yield returns in the long-run.