By Ruma Dubey

The incessant run up of the market, celebration of the BSE crossing 21,000 and hitting a new high at 21,293; the postponement of QE tapering, the euphoria of the FIIs – all these factors are directly opposite of what the economy is going through. (We all know the economic woes, so no need to get into the gritty and depressing details again) So in today’s time when all things are changing, right from the measure of human value to morality and from poverty line to measure of economic development, could it be that the BSE Sensex has ceased being the barometer of the economy?

If the answer to this question is a vehement NO, then how come the markets are surging? Clearly, it is FII driven. Take a look at the following facts:

1: According to SEBI, almost 500 brokers have officially shut shop since 1^st April 2013.

2: Total Foreign Institutional Investment in the stock market reached Rs 91,892 crore till 8^th Nov’2013. FIIs were gross buyers of equities worth Rs 15,370 crore and sellers of Rs 12,412 crore of shares during November 1-8, a net inflow of Rs 2,958 crore.

3: On the other hand, Domestic Institutional Investors (DIIs), from 1^st Nov to 8^th Nov had gross purchases of Rs.3420 crore and gross sales of Rs.6703 crore, remaining net sellers to the tune of Rs.3283 crore.

4: From 1^st April 2013 till 31^st Oct 2013, DIIs have been sellers in every single month except for June and August as against FIIs, who have been net buyers in all these months, except June, July, August.

5: Retail investors have all but disappeared, which explains shutting down of so many brokerage houses. The share of retail investors in total turnover of cash market is at a 10-year low of 34% from a high of 84% in 2003. 

6: Of a population of over 1.2 billion, barely 18 million invest in equity market. Only 10 cities contribute to over 80 per cent of trading volume in 2010.

7: The IPO market is dead. In HIFY14, only a measly Rs.1050 crore was raised by 16 firms of which only one – Just Dial was a non-SME and this IPO alone accounted for 87% of the total mobilisation.

So clearly, the new ‘highs’ which we are seeing on the bourses are entirely FII driven. The mid-cap and small-cap stocks remain largely unaffected the new highs and those few hitting new life time highs are stocks to be wary of as they are largely operator driven. Last week saw the markets yo-yo from listless, to over 300 points gain and then to end in the red and that day many gullible (should we say greedy) traders were badly trapped, leading to major losses.

With the Sensex at such levels, surely one would expect most stocks at life time highs but the data you come across is strange with more stocks at their life time lows than the stocks which are at a high. So when more stocks are low than high, it has to be a bear market, right? At least that is what old school taught us. But looks like, even this has undergone a change. Today, Reliance is no longer the mover and shaker - the day the Sensex hit a 3 year high, RIL was down 1.4%. New kids on the block, TCS, Infosys have more say than even seniors like HUL and ITC. One PSU bank, BoB posts good numbers, all PSU banks surge and boost the index.

Thus the markets today seem to have become irrelevant to the retail investors while FIIs call the shots. So should one quit or follow the FIIs? Neither. It is always best to look at one’s objectives. If the objective is to trade, well, one has to trade off risks v/s uncertainty and be willing to face the consequences. One certainty which a trader looks at currently is – risk. But if one is an investor, which is what one should ideally be in these turbulent times, then making choice picks in strong stocks is the perfect thing to do. 

Fundamentals never go out of fashion. New technical theories might come up yet, the way we assess the fundamentals of a company remains same, irrespective of the good times or the bad times. By fundamentals we mean healthy earnings, management quality, past track record, macro conditions of the industry, debt undertaken, cash balance and above all, reputation. Today, integrity is the single most important ingredient which can make or break a company. And once fundamentals are in place, a five year time span still remains the best long term time measure.

Yes, buy and hold continues to work, paying no attention to day-to-day happenings.  Equities as an asset class always tracks earnings growth. Thus if the earnings have grown by around 15%, the returns on stocks should also be around the same level. And yes, never follow the FIIs – that would be like trying to catch a falling sword.