Thursday, 21 October, 2010

What will be the next trigger for the flight of FIIs?

What will be the next trigger for the flight of FIIs?

All of us and our brothers have been told ad nauseum about the liquidity driven rally that we're enjoying on Indian bourses right now. Apparently, the FIIs are pumping in money into India as if there's no tomorrow.

Big names from the big Fund Houses like Reliance Mutual Fund, L & T Mutual Fund, etc. feel that the India Story, being as attractive as it is, will continue to see the inflow of FII money. In hoardes.

Conservative folks like the ones from MoneyLife question the inflows without giving specific reasons as to why the inflows can quickly and violently turn into outflows.

Here are a few of my thoughts on the plausible causes for such outflows:

  • Simple profit-booking urge, followed by the herd mentality
  • Crisis in some corner of the world, followed by the herd mentality - Crisis can occur in
    • US - With the mortgage and/or foreclosure mess
    • US - Job loss mess
    • China - Forex rate mess
    • France / Germany - Xenophobia and the repercussions
    • Afganistan / Iran / Pakistan - The Taliban & repercussions thereof
    • Kashmir - Pakistan - India & repercussions thereof
    • Expansionary policies of China - The South China Sea islands, Arunachal Pradesh, Taiwan, Tibet, Skirmishes with Japan, etc.
    • The Korea problem going out of hand
  • Re-emergence of some new medical emergency like Swine Flu
  • Natural calamities like an earthquake / tsunami / floods
  • A data-entry error leading to a sudden crash in some global market, followed by the herd mentality
  • Interest rates going up in US / Europe
  • Danger of inflation in India
  • Earnings not matching expectations in India
  • Earnings downgrades by Indian corporates
  • IIP slowing down in India
  • Political uncertainty catching up with India (due to some electoral reverses for the Congress)
  • Mercurial Mamata Bannerjee / Karunanidhi withdrawing support for some reason
  • Sudden death of a key political leader - due to natural causes or due to the efforts of an assasin
  • Increase in violence due to naxals
  • Increase in the Telengana problem
  • North-east Blockade re-starting in places like Meghalaya
  • The re-emergence of the Ayodhya problem either due to the far-right BJP / RSS / VHP types or due to the fundamentalist fringe elements of the Muslim fraternity
  • Sudden rule changes by folks from SEBI / RBI with respect to key policies like interest rates, M & A norms, de-listing rules, Capital controls, etc.
  • Adverse changes in either the Direct Taxes code or GST

Believe me, once the outflows start - for any reason whatsoever, the herd mentality will ensure that it will quickly turn into a flood.

And, domestic insitutions will not be able to hold up the markets because:

  • They can't - The figures of funds available with them vis-a-vis the funds likely to go out through FIIs will just not be comparable
  • They won't - Being the smart folks that they are, they will at best make a few token purchases to satisfy the Government, but the real money will be invested only if and when the markets have settled down at sufficiently attractive levels.

If you are a long-term investor,

  • Book at least partial profits
  • Sell all your cats and dogs - with or without profits
  • Don't build aggressive long positions
  • Keep enough cash
  • Don't wait for the bottom to buy - Buy on the way down for every 5-8% correction in the Nifty



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