Mumbai: Foreign institutional investors, or FIIs, who saw the value of their investments in Indian equities rise on the back of a soaring stock market and an appreciating rupee, are discovering a similar reverse movement—a falling market and a depreciating rupee—can be very painful.
FIIs, the single largest investor class in Indian equity markets, are finding Sensex, the benchmark index of the Bombay Stock Exchange, trading perilously close to the year’s low, thanks to a sharp slide in the value of the Indian currency against the US dollar, the currency in which their investments are made.
DECLINING FORTUNES (Graphic)
The BSE’s Dollex-30 index, which reflects the price value of the 30 constituent stocks of the Sensex in dollar terms, is down about 30% from its early-January peak. It closed at 3,078.73 on Tuesday.
The Dollex touched a low of 2,978.58 on 17 March, around 31.7% down from its peak of 4,365 on 8 January. The rupee traded at 39.2 to the dollar on 8 January.
FIIs have lost more than local investors because the rupee has slid almost 4.3% since mid-March. The rupee closed at 42.61 to a dollar on Tuesday. It broke the 43 level and touched a 13-month low of 43.20 in intra-day trading last week before closing at 42.97 to a dollar after the Reserve Bank of India sold greenbacks through state-run banks.
A weak rupee dents the real earnings of FIIs as they need to use more local currency to buy dollars when they convert their returns into the greenback. Similarly, a strong local currency adds to their earnings. Last year, FIIs gained from a 10% appreciation in the rupee on top of 45.5% returns on Sensex.
After offering more than 45% returns to investors for two years in a row, the Sensex lost close to 31% between 10 January, when it reached its lifetime high of 21,106.77, and mid-March.?It?recovered more than 20% to rise beyond 17,600 early-May, but has since lost more than 9% to close at 15,962.56 on Tuesday.
Wary investors are readying themselves for fresh lows. For FIIs, the rupee’s depreciation means this low could be reached in a few days if the downtrend in the market continues.
Morgan Stanley Asia Ltd’s latest equity strategy report for the region, prepared by its analysts Malcom Wood, Ryan Tsai and Corey Ng, identifies three threats for Asia—oil, food and a stronger US dollar.
While India and Indonesia are the “most vulnerable” to the spiral in oil price, the “softness in Asian currencies” is likely to be “focused on India and Korea”, the report, released late-May, said.
“The currency’s drop is adding to the losses,” said Chandra Kumar Gujadhur, managing director of Mauritius-based Apex Fund Services, an international hedge fund group that manages a billion-dollar portfolio of Indian stocks.
The Sensex could slide more from here, but the “appetite” among FIIs to buy Indian stocks, “is still there”, he added.
Apex is set to launch a couple of new funds this year, which will invest in India and other markets.
A few other FIIs admit there is still some room for Sensex to fall, considering global equity market trends. “We are expecting the correction to extend,” said a Hong Kong-based hedge fund manager who helps manage more than $5 billion across Asian markets, but did not wish to be identified.
He belongs to a group of investors that sees the fall in Sensex as a “great buying opportunity”.
FIIs have turned net sellers to the tune of $3.7 billion worth of Indian stocks so far this year after being net buyers of $17.36 billion last year.
“The rest of 2008 looks like being difficult for most equity markets,” said Deepak Lalwani, a director of Astaire and Partners Ltd, a brokerage registered with the London Stock Exchange.
The latest update from global ratings services firm, Standard and Poor’s, or S&P, on the ratings on large investment banks is a clear indication of the difficult times ahead.
S&P lowered ratings on Lehman Brothers Inc., Merrill Lynch and Co. Inc., and Morgan Stanley, and revised its outlook on Bank of America Corp. and JPMorgan Chase and Co. to negative.