Sunday, May 10, 2015

Do FII flows drive market returns?

FII flows are the drivers of the Indian market as we have learnt in the institutional derby article. Just to refresh the numbers, total institutional flows are about 80% of the market volume. Of this 3/4ths is FII flows. This made me wonder how well the index return and the FII flows would be correlated with each other. Thus about 60% of the market volume is being controlled by foreign institutional investors. From January 2002 net FII flows into the country have been 122 Bil USD - Which is over 5% of the current GDP!

The following chart sums this up:

This chart has 2 curves: The monthly index return and the % of of the total market cap of the BSE companies that FIIs invested in the country x20 in that month.  Upon the first glance the monthly return and FII flows seem fairly correlated – especially the large moves up or down. The mathematical correlation between the 2 curves is 0.56 – which does not show the true picture of the correlation given that 60% of the volume is controlled by the FIIs.

As an investor it is a decent thing to keep a tab on the FII flows. When there are massively negative FII flows there are probably several value investment opportunities and vice versa. Of course this has to be accompanied by detailed analysis of the individual stocks.