A close look at the list shows that FPIs are betting on a recovery in the small & midcap space, even though most of the stocks have corrected in the last one year.
Foreign Portfolio Investors (FPIs) raised stakes in 145 stocks in the last four quarters, and three of those more than doubled investors’ money.
Stocks in which FPIs raised stake include Bharti Airtel, ONGC, Asian Paints, HDFC Life, SBI Life, HDFC AMC, ICICI Pru, Vedanta, Petronet LNG, InfoEdge and Muthoot Finance, data from AceEquity showed.
A closer look at the list shows that FPIs are betting on a recovery in the small and midcap space, even though most of the stocks have corrected in the last one year. Nearly 50 percent of the stocks gave negative returns, the data shows.
“Yes, it does look like there is a value play as FPIs are betting on mid and small-cap stocks. This space has been down for quite some time and there were stocks that were available at very much cheaper valuations,” Mustafa Nadeem, CEO, Epic Research, told Moneycontrol.
“We have been upbeat in smallcap and midcap space, given the outperformance they add, and how they tend to create alpha for the overall portfolio in the long term. Some of the stocks we are seeing in the list are having consistent business growth in double digits.”
Economic revival and subsequent recovery in earnings can definitely lead to an increased interest in the small and midcap stocks, as they have been underperforming the markets for the last one and a half years, say experts.
Most experts say that the worst may not be over but agree that recovery is in sight, thanks to the measures taken by the government to boost consumption and growth in Asia’s third-largest economy.
“We feel attractive valuation could be one of the key parameters that may have driven FIIs to certain smallcap and midcap stocks. Further, stocks like ONGC (high-dividend yield stock), HDFC AMC, Asian Paints, SBI Life, Dr Lal, IGL, etc are fundamentally sound stocks and are market leaders in their respective industries,” Ajit Mishra, VP – Research, Religare Broking Ltd, said.
FIIs bets on stocks with a good track record, hoping that these stocks would drive the rally in midcap and small caps on signs of recovery begins. “Further, inflation trajectory, monetary policy and pick up in capex cycle are likely to be the key triggers that could further increase FIIs’ confidence,” he said.
HDFC AMC, Aavas Financiers and Hindustan Foods were three of the 145 stocks that more than doubled investors’ wealth in the last one year.
These stocks have a strong growth record and corporate governance, which is attracting both local and global money, say experts.
“HDFC AMC, Aavas Financiers, and Hindustan Foods have very strong corporate governance with good future prospects but valuations of these stocks are very stretched, hence we do not recommend to buy these stocks at current levels. However, correction in these stocks can provide a good buying opportunity,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities, said.
What should investors do?
FPIs are diligent in picking stocks but investors’ should not base their investment decision only on stocks in which foreign investors raised their stake. The list can be used by long-term investors to shortlist stocks.
Matlawala is of the view that investors should look at corporate governance, valuations and growth outlook before investing in a stock.
“FIIs are very nimble-footed and make their decisions very fast. This quality helps them to spot outperformers very quickly but the pitfall is they are equally quick in selling the stock,” he said.
Stocks such as Tata Global Beverages, Kajaria Ceramics, and AU Small Finance Bank can give good returns in the medium to long term, Matlawala said.
FII investment and its stake is one of the key filters that investors can use while shortlisting stocks to find out where the smart money is moving but that isn't the case every time. Caution is always advisable along with own research, experts say.
“There are many stocks in the list that have been consistently destroying the wealth. We have been upbeat on the insurance sector for around a few months and it is still an untapped market in an emerging economy such as India as compared to other economies,” said Nadeem of Epic Research.
The growth seen in private insurers such as HDFC and ICICI in the last few quarters is very promising. So one can look at this space, he said. At the same time, stock such as Dr Lal Path adds good quality, diversification and a good balance sheet, Nadeem said.
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