Kotak Institutional Equities argues that institutional inflows and outflows are irrelevant to stock valuations because the secondary market is a zero-sum exchange. The firm asserts that long-term price movements are driven by earnings per share, while short-term volatility stems from valuation multiples. Investors are encouraged to focus on company fundamentals rather than tracking daily flow data.
A new report from Kotak Institutional Equities has challenged the widely held belief that institutional capital flows, such as foreign portfolio investment (FPI) buying or selling, are the primary forces behind stock market movements. The brokerage argues that these flow metrics are a distraction and that investors should instead focus on the core factors that actually determine the value of a company.
The Myth of Market Liquidity
The central argument put forward by the firm is that the secondary market is a zero-sum game. When a stock is traded, it is essentially a transaction between two people—a buyer and a seller. The brokerage points out that money does not leave the market during these trades; it merely changes hands. Therefore, tracking the movement of institutional money into or out of a stock does not explain the price trajectory. According to the report, the total number of shares remains constant in these transactions, making the concept of liquidity inflows impacting valuations a fundamental misunderstanding.
Instead of watching flow data, the brokerage suggests that investors look at two primary drivers: earnings per share (EPS) for long-term growth and price-to-earnings (P/E) multiples for short-term sentiment. The report indicates that when investors update their expectations for a company’s future earnings or change their required return, the stock price adjusts accordingly. This is a reflection of changing business fundamentals rather than the result of temporary capital shifts.
Why Macro Factors Still Matter
While the brokerage minimizes the importance of flow-based narratives, it acknowledges that real-world problems can and do affect stock prices. However, these factors—such as geopolitical conflicts, volatility in crude oil prices, and monsoon patterns—influence the market by changing the fundamental business environment. For example, a sharp rise in crude oil prices or regional instability in West Asia can hurt a company's profit margins or raise borrowing costs. In this view, macro events do not move stocks because of "liquidity" changes; they move stocks because they change the outlook for the company’s future cash flow.
What Investors Should Monitor
For investors, this perspective suggests that daily headlines about institutional buying or selling may often be noise. The most reliable indicators for long-term performance remain the actual financial health and growth trajectory of the company. Investors may track company-specific earnings reports, margin trends, and valuation multiples relative to historical averages. This approach moves the focus away from market sentiment and toward the specific metrics that define whether a business is creating value or facing structural pressure, such as increased competition or sector-specific slowdowns.