India-focused funds, ETFs mop up $5 bn in Jan-June

India-focused offshore funds and exchange traded funds (ETFs) have received net inflow of $4.8 billion in the first six months of the year, the second highest in five years. The category had seen net inflow of $7.3 billion during the same period in 2015; however, it saw net outflows in 2013, 2014 and 2016 for the period. 

The flow this year largely came into India-focused offshore funds, which signify long-term money, against India-focused offshore ETFs, where the money is largely short-term. India-focused offshore funds received net inflows of $3.8 billion, compared with inflow of $1 billion for that of ETFs.

“While FPIs (foreign portfolio investors) are looking at India from a long-term perspective, this could reverse if expectations of the managers on economic growth are not met,” said Himanshu Srivastava, senior research analyst - manager research, Morningstar Investment Adviser India.

The portfolio of India-focused offshore funds and ETFs showed an affinity sectors that stand to benefit from the fall in interest rates, a turnaround in the economic cycle and a rise in urban consumption demand.

“There has been interest in financial services and consumer cyclicals, particularly automobiles and auto ancillaries, followed by basic material sectors such as cement and metals. These funds are reducing exposure to information technology, pharmaceuticals and communication services, given the ongoing concerns and uncertainty in these sectors,” said Srivastava.

After seeing significant outflow in the December quarter, FPI flow into Indian equities was robust. They pumped $8 billion during January-June. Around $5 billion came in March, after the impact of demonetisation became clearer and the poll results in five states. However, the flow slowed in the following months.

This year’s FPI flow into equities for the first six months have been the third highest in the past five years, with the highest in 2013 ($14 billion), followed by that in 2014 ($9 billion). According to experts, FPIs will turn their focus on the impact of the goods and services tax on the economy and look for signs of a pick-up in earnings growth. Aggressive rate hikes by the US Federal Reserve in the coming months could also impact the sentiment and lead to money moving out of emerging markets.