How re-rating by foreign institutions is increasing volatility in stocks?

Published: Monday, August 27, 2012, 8:57 [IST]

How re-rating by foreign funds is increasing volatility ?

Last week until Friday, Infosys had churned impressive returns for the week, after the Palmer case was thrown out by a Court in the US. Come Friday, Infosys fell sharply following reports that BofA-Merrill Lynch warned to stay cautious on the stock.

Bharti Airtel plunged to a six year low after a series of downgrades from foreign institutions and foreign broking firms. Goldman Sachs, downgraded the stock to 'neutral' from 'buy', and said Bharti's under performance may be attributed to regulatory risks and weaker execution, accompanied by loss in market share. The shares plunged to abysmal depths following the downgrade.

This was followed by Credit Suisse which downgraded the company's scrip and cut its target price citing the possibility of Reliance Infotel entering the voice market and 'high downside risks over the next 12 months'.

Regular downgrades by FIIs and foreign broking firms following quarterly results and regulatory changes is seeing increased volatility in stocks.

Interestingly, downgrades by Indian broking firms and brokerage houses hardly have an impact like those from foreign broking houses and FIIs, which because of their huge money clout have been driving stock markets these days, despite India's weakening economic fundamentals.

Sometimes foreign funds leave investors thoroughly confused. At one point they recommend buying a stock and after a few weeks when things turn, they suddenly recommend selling the stocks

Even upgrades from these foreign institutions see sudden interest in stocks that sometimes lead to over exuberance and rampant speculation.

Hindustan Unilever has surged almost 15% following a CLSA upgrade, which retained its "overweight" rating. The brokerage called the earnings "a strong all-around performance" that showed growth across volume, earnings before interest, tax, depreciation and amortisation (Ebitda) and margins.
Morgan Stanley too had some positive comments to make following HUL results, and the stock has seen an upward momentum since July, giving staggering returns of more than 15%.

Clearly, it seems that speculators and investors are riding-piggy back on what foreign funds recommend, adding to volatility in stocks.

GoodReturns.in

Story first published: Monday, August 27, 2012, 8:57 [IST]

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