Inflows into India-focused funds stood at $11.6 million (Rs46 crore) in the week ended 19 September, a recent Citigroup report points out, quoting data collated by EPFR Global. Meanwhile, inflows into Asian funds stood at $982 million during the same period, and global emerging market funds garnered a record $1.8 billion.

Though the year-ago weekly inflows data isn’t available, interest in India-focused funds appears to have plummeted this year. These funds have seen net outflows of $2.2 billion, next only to China funds, which have seen net outflows of $3.5 billion so far this year. The year-till-date outflows from India-focused funds far exceed the inflows of $1.5 billion in the same period last year. Year-to-date inflows date wasn’t available.

Investor mood for offshore India funds almost matches the view of global emerging market fund managers. A recent survey by Merrill Lynch shows that 50% of them were underweight on India relative to benchmark weightage. Only 21% were overweight.

The pertinent question is: how come foreign institutional investors have still brought in $10.5 billion into Indian markets, the highest ever on a year-to-date basis?

The key is that, apart from India-focused funds, fund managers also allocate a proportion of their Asian funds, global emerging market funds and world funds to Indian stocks. A number of funds simply mimic a benchmark index, such as the MSCI emerging markets index. One such fund, the iShares MSCI EM Index fund, got inflows of $1.1 billion last week, for instance.

But, while India may continue to get some share of the inflows into emerging market and Asian funds, it is important to note that India is clearly among the out-of-favour markets in the emerging markets space. The situation improved in the four weeks up to 19 September, but only just—net inflows into India-focused funds stood at $157.8 during the period. Merrill Lynch’s fund manager survey also points to a slight improvement. Just a month ago, 68% of the managers were underweight on India—this has reduced to 50%.

Market breadth

Institutional investors sold large-cap stocks during the panic in August and now they’re buying them back. That has been the trend between 18 and 21 September, the three days after the US Federal Reserve rate cut. MSCI data show that while large-cap stocks in the MSCI India index went up 5.9%, mid-cap stocks rose 4.7% and small-cap stocks went up 3.6% in these three days. But the logic doesn’t seem to hold for all emerging markets. In the Emerging Market Asia index, large-caps have gone up 4.7% over the three days, mid-caps 4.9% and small-caps 2.7%. If investors are buying back large-caps, there’s little reason why they should do so in India alone.

The market has moved up sharply after the rate cut by the Fed, but there are mixed signals on market breadth. As many as 108 stocks hit their 52-week highs on 19 September, the day after the rate cut when the Sensex went up 654 points. That number went up to 220 on 21 September. And it’s worth remembering that information technology stocks have been left out of this rally.

However, the picture is not so rosy if the ratio of advancing stock to declining stocks is considered. In the three days between 19 and 21 September, advancing stocks outnumbered declining stocks only in the A group. Advances beat declines 152 to 60 in this group. Among B1 group stocks, declines outnumbered advances 394 to 321, while among B2 stocks, there were 467 declines against 300 advances. Among other stocks, the ratio was even worse, with 607 declines to 415 advances in these three days. The adverse advance-decline ratio in the B group and among other stocks was a reflection of the fact this rally has been led by foreign institutional investors buying those stocks they had dumped in August. That doesn’t mean, however, the rally will not spread to the mid-cap and small-cap stocks.

Over a longer period, mid-cap stocks have outperformed the large-caps both in the Indian as well as in all emerging markets. For instance, large-cap stocks went up 12.6% in the last three months, while mid-cap stocks moved up 14.15%. For the emerging markets Asia universe, large-caps returned a gain of 11.95% over the last three months, while mid-caps moved up 13.7%.

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