Global EM funds reduce India exposure

Currency headwinds, profit-booking lead to decline in allocations; nervousness on pace of reforms, growth also a factor

Global funds focused on emerging market equities had reduced their exposure to India by a little over 0.5 per cent over the first quarter of 2015, on the back of currency depreciation. These funds accounted for inflows of about $5 billion (Rs 32,000 crore) in the first three months of the year.

The exposure to Indian equities by global emerging market (GEM) funds declined to 12.2 per cent in March this year, down from 12.8 per cent earlier in January, said a report from Kotak Institutional Equities, due to the rupee’s fall.

Total flows into India from global funds investing in EMs, by both exchange-traded funds (ETFs) and non-ETFs, have been a little over $5 bn.

“Allocations to India by Asia ex-Japan funds and GEM funds has come off the peaks. Exposure to India by Asia ex-Japan funds fell by 0.8 per cent month-on-month (to 12.9 per cent in March). Rupee depreciation might have also impacted dollar-denominated allocations,” said the report, authored by analyst Saifullah Rais.

Since January, the rupee has depreciated by about one per cent against the dollar. Market participants also said  the overweight positions on India held by most of these funds was another reason for the reduction.

“For six to nine months, these funds have been maintaining an overweight position on India. So, we are seeing some profit-taking by these. Also, globally, there is a risk-off behaviour, which is why flows into the EM regions and to India, in particular, have been slowing,” said Rajesh Cheruvu, chief investment officer, RBS Private Banking, India.

India has been among the worst performers in EMs this year, having declined about eight per cent from its peak.

“This is also a reflection of the lack of progress in reforms in the past year. People are a bit worried because the speed at which the turnaround has happened has been disappointing,” said U R Bhat, managing director, Dalton Capital.

Analysts said recent events such as the government’s stance on imposing Minimum Alternate Tax on foreign portfolio investors, rising commodity prices, the slow recovery in the economy had made investors nervous. This was aggravated by slowing of the Chinese economy and improvement in the US and European markets.

The report said a large proportion of flows are coming from ETFs. In the past month alone, about $1 billion of flows have come into India, of which $897 million was through the ETF route.

“Active funds are substantially overweight India, considering the average GEM-focused ETF allocations to India amounted to seven to eight per cent,” said the Kotak report, dated May 11.

Experts said flows into India could see some pressure as data from the US and Europe continues to show improvement. Beside, re-allocation to other better performing markets in the EM region could continue in the absence of any market-moving triggers.

“But we could see some change in sentiment if the Reserve Bank decides to cut interest rates in the June policy review. Also, we can see the first signs of economic turnaround and some improvement in corporate earnings, which could be good for the markets,” said Bhat.