Foreign institutional investor (FII) buying has a lot more influence on market movements than FII selling, finds an FE study that tracked market movements of a decade. In the last decade, 76% of the times, the equity market ended on a positive note on the days FIIs had bought.
In contrast, when FIIs sold, the market ended lower only 49% of the times. For the study, daily Sensex (^BSESN : 17876.55 +305.73) returns were compared with the daily buying and selling figures of FIIs.
It is likely that FII selling has comparatively less influence on downward trends since domestic financial institutions -mainly insurance companies-play a dominant role in the market, especially when it falls. They have been found to act contrarian, in many instances, and buy when the market corrects.
Ulip policies, with a mandate to invest in equities, have been backing up the market through the last few years. Yet, in the last five years, the domestic institutions' ability to influence market movements had reduced largely because FIIs had been investing more than ever in the equity markets. They invested close to $17 billion in the calendar year 2009.
How will the FII power play out in a bull or a bear market? FIIs influence is greater when it is in sync with the market trends. For instance, in the bear markets of 2002 and 2008, when equity markets tanked, their influence level shot up whenever they sold. Similarly, during the bull run of 2003-2008, their buying influence was 81% of the times (market ended positive, that is). In 2008, when markets corrected, the influence level also fell to 55%.
Interesting trends emerge when these daily FII selling and buying patterns are sliced on the basis of the quantum of buying or selling. For instance, whenever FII sold Rs 500 crore or more, it was found that 75% of the times, market corrected at least by 1%.
On an average, the equity market corrected 1.6% whenever the FIIs sold Rs 500 crore or more. The market influence was similar in buying, too, when equity markets closed positive, though the extent of market influence was less. Here, the average daily upside in the Sensex was 1%.
