Investors in Indian mutual funds have, by and large, kept their faith in the stock markets even after the sharp drop in prices since January. They invested about Rs12,513 crore in equity growth schemes between February and May this year. By mid-February, the markets had corrected by 23% from their highs in January, which, one would have imagined, should have led most of these investors to head towards the exit door.
But as Sanjay Sinha, chief investment officer at SBI Mutual Fund, points out, inflows into equity schemes now tend to go up on days when the market corrects sharply. He interprets that investors may be seeing relatively lower prices as a “value-buying” opportunity. Another fund manager points out that the reason some investors are buying equity funds and/or stocks is to average out their acquisition cost to lower levels. Besides, the concept of regular monthly investments through systematic investment plans (SIP) has caught on in recent years, giving many fund houses access to regular inflows.
All these factors have helped net inflows to be in positive territory in each of the past four months, despite the turmoil in the stock markets. In previous large corrections such as in May 2004 and May 2006, equity schemes had seen net outflows in period immediately after the correction. Outflows stood at Rs656 crore in the four months between June and September 2004, and at Rs1,463 crore between June and September 2006.
Another factor that’s helped inflows to be as high as Rs12,513 crore this time around is the fact that some new fund offerings (NFOs) that were launched in January (but closed in February/March) managed to collect large sums despite the correction. Chief among them was Reliance Mutual Fund’s Natural Resources Fund, which collected Rs5,660 crore in the NFO phase. But even if one were to exclude total NFO collections, inflows into existing schemes have been higher than redemptions. Note that many mutual fund investors redeem existing investments and deploy the funds in NFOs, so it’s significant that existing schemes have seen net inflows. In 2006 and 2007, for instance, redemptions in existing schemes exceeded inflows by Rs3,076 crore and Rs8,083 crore, respectively. Equity schemes overall saw net inflows in these two years because of NFOs worth Rs36,741 crore and Rs29,284 crore, respectively.
The strong net inflows this year is the reason the industry has been a big buyer in the markets this year. They’ve bought stocks worth more than Rs8,823 crore so far this year, higher than what they bought in the whole of 2007 (Rs6,316 crore).
But with markets showing no sings of recovering in the near term, mutual fund investors’ patience may soon run out. Besides, new fund offering having practically stopped, which means the inflows seen in the past few months may soon be a thing of the past. This is also what the data on inflows into equity schemes in the past two months suggest—although positive, they’ve been much slower than in February and March.
For China, the decoupling thesis is back
There’s a growing dichotomy between the manic-depressive behaviour of the Chinese stock market and the country’s robust economic growth. On Thursday, the World Bank raised its forecast for Chinese growth to 9.8%, barely two months after it lowered it to 9.4%. The decoupling thesis seems to have returned from the grave.
The World Bank is only bowing to reality, as a spate of numbers coming out of China indicates that growth remains very strong. For instance, fixed asset investment for January-May is up 25.6%, just a touch less than the 25.9% growth a year ago. Industrial production growth last month was 16%, compared with 18% in May 2007. Export growth has been 28% in May, when retail sales rose 23.6%. The signals emanating from the stock market, however, are a study in contrast. After Thursday’s precipitous drop, the Shanghai Composite Index is down 55% from the heights it touched last October.
Chinese officials have been quick to point to the divergence between the markets and the economy, predicting that the market will pick up soon. But the central bank’s recent bout of monetary tightening appears to have spooked the markets.
There are several consequences that could follow from the upward revision in China’s growth rate. If growth continues to be strong, that would mean Chinese demand for commodities, too, will remain high. China’s imports grew at a whopping 40% year-over-year rate in May. Simply put, the stronger Chinese growth, the lesser the chance of commodity and crude oil prices coming off. That could keep inflationary pressures high across the world. On the credit side, with China being a big trade partner, growth in China will be good for our exports.
At the same time, the continuing slide in the Chinese market does not bode well for India. Fund managers who used to be bullish on India during the last frenetic stage of last year’s rally, invariably pointed to the Chinese market and said that India had a lot of catching up to do. If they use the same logic on the downward leg of the journey as well, the Indian market may have a long way to fall. The Sensex is down 29% from its January highs, only about half the fall in the Shanghai index.
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