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Indian shares are attractive to foreigners, unattractive to locals
Foreign investors have bet on a possible turnaround in India’s economy. They expect India to return to a faster pace of growth. They also expect Indian companies to report an improvement in profits.Foreign institutional investors or FIIs have invested just under $ 6bn in Indian equities in the first five weeks of 2013. This is nearly a quarter of $ 24.3bn invested in the entire 2012 calendar year.
During the same period, domestic institutional investors have taken a divergent view. They sold (on a net basis) Indian equities to the tune of (Rs 5566 crores as of 5th February) or 1.04 bn $ at current exchange rate according to data from Securities and Exchange Board of India.
Here are some pointers that explain the divergent trend:
Money flow to emerging markets rising: Institutional investors overseas are allocating more money to emerging markets in 2013 as global risk appetite increased. This means these investors are prepared to invest in high risk high return equity assets. This follows record flows in US-listed equity mutual funds and exchange traded funds. “India received strongest flows in recent times in January 2013 (at $ 1.3bn in four weeks),” said an analysis by Kotak Securities on flows into emerging markets. India is not alone. Equity markets in China and Korea also witnessed large inflows during the same period.
Indian government making right noises: Finance minister P Chidambaram visited Hong Kong, Singapore and London to address international investor concerns. He assured to foreign investors that India will focus on reforms and control the fiscal deficit. The fiscal deficit is the gap between the government revenue and expenditure. The government usually borrows the money equal to the fiscal deficit from the market. “The government’s fiscal roadmap is welcome, but the quality and sustainability of consolidation are more important than meeting short-term targets,” said a new International Monetary Fund or IMF report on India.
Domestic institutional investors face outflows: Domestic mutual funds are forced to sell in the market. They have dumped equities to the tune of $ 1.2bn in the first 5 weeks of 2013. This is because mutual fund investors pulled out a record Rs.4,713 crore (or $ 870m) from equity schemes of asset management companies (AMCs), according to data from Association of Mutual Funds in India. This is the highest in any January and also the highest monthly redemption of equity schemes in 27 months, according to a report in the Mint newspaper. The paper also said that domestic investors prefer debt funds to equity funds.
Indian economy not out of woods: If the commentary on the future outlook for the Indian economy from IMF and Reserve Bank of India is anything to go by, India could see a slow recovery going forward. According to IMF’s October 2012 World Economic Outlook, the probability of global growth falling below 2% rose to one in six. “A major global financial shock would present serious funding and liquidity risks for India,” said the IMF report on India for February 2013. This is simply because India relies on foreign capital flows to finance its current account deficit. The current account deficit occurs when a country has more foreign currency liabilities due to higher imports than exports and other factors.
Foreign institutional investors currently own 20.3% of the free-float of BSE 500 index market capitalisation, according to the latest data from Securities and Exchange Board of India and Bombay Stock Exchange. ‘Free-float’ is the percentage of shares available for trading on stock exchanges. Usually, this is the non-promoter holding in companies. In comparison, at Rs 2,00,000 crore of equity assets under management, domestic mutual funds barely own equities equivalent to 6% of the BSE 500 free float market capitalisation.