Year end traditional market theory


Come November and the market starts discussing possibilities of foreign funds exiting Indian equity markets due to their approaching year end and re-entering in the New Year, post Christmas vacation. It is widely believed that Foreign Institutional Investors (FII) press the sell button during November and December in order to met year-end profit targets given by their parent companies.

The profit booking is also attributed to the fact that year-end bonuses of the fund mangers largely depend on the realized profit during the calendar year. It can be true or just a myth and whatever is the case may be the real predicament in the minds of find managers is what investment strategy they should pursue at this time.

While the word going around suggests that the stock market will remain weak during the end of the year period and bounce back at the beginning of the year. An analysis of investments conducted by FII from 1999 reveal a different story. Cold hard data for November and December, over the past 7-8 years reveals that except for November 1999 and December 2000, FII investment has been positive.

On the contrary, recent years (2003 to 2005) have seen a rise in foreign inflows. In fact this year end period so far FII have invested $ 1.1 billion in the domestic equities market. Further the Sensex movement during November and December period, again for the last seven years interestingly has reported gains of 7 to 19%

The merging markets are strategic markets for foreign funds and they have dedicated teams monitoring these markets. With their gaining importance as a significant investment opportunity, it is difficult for FII to act callously with these markets. That’s probably the reason why FII activity has remained robust during the last three years.

As the market has actually gained in the last seven years since 1999, does this mean that it is a good time to enter the market? Absolutely not, it is extremely difficult to predict foreign funds, particularly for small and retail investors. The better option is to

stick to one’s own investment strategies without bothering about the FII activities, which is, anyway, beyond anyone’s control and are absolutely unpredictable. Remember, history does not work well when it comes to equity markets. The recent crash of over 275 between mid May to mid June 2006 re-emphasizes the market’s vulnerability to foreign money.

While foreign money plays a crucial role in deciding the fate of the market, it is difficult to predict its movement, particularly for small investors. Moreover, it could be disastrous for the investor to formulate or alter investment strategy based on expectations of future foreign inflows or outflows. For best results the investor must stick to his planned long terms investment strategies.