Mumbai: Inflows from foreign institutional investors (FIIs), the main driver of Indian equities, topped $20 billion (around Rs.1.1 trillion today) in the first 11 months of the calendar year—the second highest since 1993, when India opened the doors to this class of investors.
A rise in global liquidity, following quantitative easing by central banks in Europe and the US, is seeing money flowing into emerging market stocks. A cheaper rupee has also made Indian markets attractive as the dollar stretches further. The rupee has fallen 2.96% against the dollar since January.
Foreign funds began increasing exposure to Indian equities in the beginning of calendar 2012, after taking money out in 2011, following two tranches of liquidity injection worth €1 trillion (around Rs.72 trillion today) by the European Central Bank via its long-term refinancing operations programme.
After a lull in the middle of the year, flows gathered steam in September with the government kicking off a long-pending economic reform process with the relaxation of foreign investment norms in airlines and retail, among other measures, ending a lengthy policy impasse. Investors were also buoyed by hopes at the time that US lawmakers would agree on a budget deal by the year end to avoid a fiscal crisis.
“In a world of easy liquidity, investors are clearly looking for fundamental investment opportunities that can play out in the next decade or so, and India certainly qualifies for the same,” said Sivasubramanian K.N., chief investment officer, Franklin Equity—India, Franklin Templeton Investments, which manages assets worth at least Rs.39,000 crore. “A combination of quantitative easing in the developed world and the government’s efforts to change the perception about policy-making during the second half of 2012 has led to strong inflows in the country.”
As investor optimism picks up, global fund preferences are changing and money is moving from Europe, Russia and the Middle East markets to emerging market stocks that offer comparatively higher returns.
“The diversified global emerging markets accounted for the biggest share of the overall inflows, with Asia (ex-Japan) equity funds standing out among the three major regional groups,” according to fund tracking firm EPFR Global in its 30 November Global Funds Data news release. “Redemptions from emerging Europe regional funds hit a 28-week high in spite of the euro zone’s latest debt deal with Greece; Russia equity funds recorded their eighth consecutive week of outflows; and Middle East regional funds had their worst week—in flow terms—since late March.”
Between January and March, a little over $9 billion flowed in, with the Sensex, BSE’s bellwether equity index, registering a 12.6% gain. In April and May, when the market dipped 6.8%, FIIs turned net sellers of Indian equities. They made a strong comeback in September, buying $3.8 billion of stock, the most in any single month this year. Between September and November, FIIs pumped in close to $8 billion after the Indian government started pushing reforms aggressively despite stiff political opposition.
India’s key equity indices have gained at least 25% this year, putting them among the top performers in emerging market indices.
The Sensex has gained 25.14% and the broader 50-share Nifty of the National Stock Exchange of India has risen 27.12% in the period until November. On Tuesday, the Sensex rose marginally to 19,348.12 points and the Nifty to 5,889.25.
The Sensex is the fifth biggest gainer among major emerging market indices, and the Nifty occupies the fourth spot.
Among other emerging markets, Pakistan’s KSE-100 has risen 46.25% in the year so far. Its local currency has fallen 6.9% against the dollar in the same period. The Philippines PCOMP index is up 30.3% even as the peso has gained 7.2% against the dollar. Thailand’s SET index, up 29.9%, is the third best performer, while the baht is up 2.9% against the dollar.
According to market experts, India’s more or less resilient economy has also helped attract flows of this magnitude at a time when developed economies continue to limp back from a slowdown. India has continued to clock growth of at least 5%, albeit slower than in the previous years, in gross domestic product (GDP) even as several major economies witnessed contraction.
“Investors continue to chase GDP growth stories, where India, despite its many woes and blockages, continues to grow at more than 5%. A combination of quantitative easing and a sense that the worst is behind the Indian economy suggests that this liquidity will continue to come to India,” said Tarun Kataria, chief executive officer (India) at Religare Capital Markets Ltd.
At the end of September, FII holdings in Nifty companies were at a six-year high even as public shareholding fell to its lowest in as many years. FII shareholding in 44 companies of the Nifty-50 index, at 18.38% of total equity, was the highest in at least 25 quarters. The Sensex stocks also showed the same trend.
“Data suggests that FII holding in Indian equities is currently at close to all-time highs,” Franklin Templeton’s Sivasubramanian said. “The flows could be volatile over the short term; depending on global events, the long-term direction is positive. The key differentiating factor is obviously the large share of domestic demand in overall gross domestic product, but there is a clear need to take forward reforms and deliver on the fiscal consolidation projections.”
While there are clear signs of a swing in investment sentiment from extreme pessimism to guarded optimism, external events could spoil the party, warn experts.
“With positions over the solution to the so-called fiscal cliff (in the US) appearing to harden again, these flows could reverse themselves in short order,” observed EPFR Global research director Cameron Brandt.
On the domestic front, however, bullishness is slowly returning to the market as India’s central bank is expected to cut its policy rate in January, pushing down the cost of money even as there are signs of so-called core inflation, or non-food, non-oil, manufacturing inflation, easing in Asia’s third largest economy.
In the near term, the ruling United Progressive Alliance government’s ability to push through the proposal of allowing foreign direct investment in organized retail will have a bearing on the market, analysts said.
“The overall outlook and investment sentiment towards the equity market has improved significantly over the last three months. Most fund managers are positive on the market from a one-year perspective. Majority of the fund managers expect the market to be up in a range of 15-20% at the end of one year,” ICICI Securities Ltd said in its fund managers’ survey on 3 December. “Opinion, however, seems divided over valuations of the market, with 50% of the fund managers believing that equity markets are undervalued, while the remaining 50% believe it to be fairly valued.”
Krishna Merchant contributed to this story.