>Ownership Data for 4Q09 : More Portfolio Churn Coming (MORGAN STANLEY)

■ Key Debate: Does institutional ownership suggest that sector performance is about to inflect? It appears that institutional investors have been selling Telecoms in the fourth quarter of 2009 but still have that sector as their largest overweight position. In contrast, they have been buying energy in the past quarter and narrowing the underweight position in that sector. Telecoms and Energy were among the underperforming sectors in 2009.

■ Summary of Shareholding Changes for the QE December 2009: There was little change in aggregate ownership of stocks across various categories of shareholders. FII stake in our sample of India’s top 75 companies as well as the broad market remained more or less unchanged at 19% and 17%, respectively. While domestic institutional shareholding went up slightly, shareholding of households declined a little.

■ FII Portfolios: By our estimates, about 50% of the net buying by FIIs during the quarter ended December 2009 was outside our sample of India’s top 75 companies. That said, the average sector position size declined to 113 bps, its lowest level since March 2008 – indicating lower conviction at the sector level.

■ Key Sector Positions: Institutions, on aggregate, sold Telecoms, Industrials, Staples, Utilities and purchased Financials, Energy, Materials, Consumer Discretionary, Healthcare and Technology (all in that order). Institutions at the end of the quarter appear most overweight (versus the MSCI India sector weights) on Telecoms, Financials and Consumer Discretionary and most underweight on Technology, Energy and Utilities. The largest change in sector position for domestic institutions (including insurance companies and mutual funds) was Financials with a 283bp decline in its underweight position, followed by Telecoms, for which the overweight position reduced by 130bp. The three largest overweight positions are Consumer Staples, Industrials and Telecoms whereas the biggest underweight sectors are Technology, Financials and Energy. FIIs appear to be overweight Financials, Telecoms and Consumer Discretionary in their portfolios. Underweight positions in Energy, Industrials and Materials are funding these overweight positions. FIIs sold Telecoms and Financials while purchasing Energy and Consumer discretionary during the quarter ended December 2009.

■ Conclusion: Our recent investor survey suggested that the buy side consensus is bullish on Financials and Industrials whereas Consumer Staples and Telecoms are the least favored. The ownership data from the previous quarter more or less concurs with this with the exception of industrials. That said it would appear that further changes are needed in ownership levels for their views to be reflected in their portfolios (for example, more selling in Telecoms and more buying in Financials and Industrials).

To read the full report: INDIA STRATEGY