In midst of a storm: 270 stocks in BSE 500 with high FII exposure face selling pressure

The last two months have been painful for investors as well as traders. The Indian market has plunged more than 30 percent from its recent high, and much of the selling was seen in foreign institutional investors (FII) heavy stocks.

There are more than 270 stocks in the S&P BSE 500 index in which foreign investors hold more than 10 percent stake as of data collated from December quarter.

More than 95 percent stocks in the S&P BSE 500 index in which FIIs hold majority stake have given negative returns so far in the year 2020. There are as many as 54 stocks out of 270 in the S&P BSE 500 index where FIIs hold majority stake and they have plunged more than 50 percent in the same period.

Stocks that fell more than 50 percent include names like Gayatri Projects, Vedanta, RBL Bank, JustDial, Ujjivan Financial Services, Adani Power, HEG, and M&M Financial Services, etc. among others.

FIIs have been net sellers in Indian markets for over Rs 60,000 cr in the cash segment of the Indian equity markets. They pulled out more than Rs 12000 cr in February, and over Rs 5,000 crore in January, data from Moneycontrol.com showed.

“The outbreak of Coronavirus across the globe has impacted the sentiments of investors worldwide. It has led to a sharp correction in the 54 stocks mentioned as they either belong to the sectors that are highly cyclical or are facing company-specific issues,” Ajit Mishra, VP Research Religare Broking told Moneycontrol.

“Further, given the heightened selling pressure by the FIIs in the past one month, the decline in the prices has aggravated. In our opinion, instead of focusing only on FII heavy stocks, the prudent approach here would be to stay with fundamentally sound stocks and accumulate them in a staggered manner,” he said.

Note: The tables given are for reference only and not a buy or sell recommendations

Due to poor macro environment and fears of recession looming, selling pressure was seen in stocks across largecap, midcap as well as smallcap. Selling pressure was not just limited to India but it was across the world.

“Equity Funds saw over $50 billion flow out during the quarter and Bond Funds set weekly and monthly outflow records on their way to their biggest quarterly outflow since 3Q13,” EPFR Global said which tracks institutional and individual investor flows in global markets.

“FII heavy stocks have underperformed the index as Sensex has slipped approx 30% recently in comparison to stocks which have fallen 50%, whereas investors are concerned it is advisable to invest money in fundamentally sound companies rather than just following FIIs, if the company you invested in is fundamentally sound one can hold the position,” Ritesh Asher – Chief Strategy Officer (CSO) at KIFS Trade Capital told Moneycontrol.

“Fundamentally strong companies such as HUL, Navin Florine, Granules India have so far effectively saved themselves from the heat of macro factors taking place,” he said.

What should investors do?

The next big question in front of investors what should they do if they have stocks in which FIIs are heavily invested. Does it make sense to reduce the holding? Or what are the other factors which should be looked at before pressing buy or a sell button?

Well, experts feel that FII ownership should not be looked in isolation when making an investment call. FIIs could be selling due to varied reasons; hence, it is not just limited to the fundamentals of the company.

It would be wise to first understand the qualitative and quantitative aspects of the company before taking any decision related to buying or selling the stock.

“Investors should look at both quantitative as well as qualitative factors before investing. They should see that the company has prudent management, strong corporate governance, comfortable valuation and healthy financials with long term growth visibility, lower debt to equity ratio and sound balance sheet,” says Mishra.

Asher of KIFS Trade Capital is of the view that investors should not worry about FIIs based data if they have invested in the correct stock, because in the past few weeks DIIs managed to absorb the sell-off made by FIIs.

“As mentioned previously, investors should go through the study of stocks they are planning to invest in like what does the company do, is it financially strong, who is the management, are there any corporate governance issues, product line, vision & mission, valuation, etc before taking any decision to buy or sell a particular stock,” he said.