More FIIs bearish on India in Jan

Sluggish market, inflation take toll; BofA-ML survey finds optimism on global growth.

The slowing reforms, lack of enough government spending and high inflation have hit investment sentiment in the country.

Foreign institutional investors (FIIs) have increased their underweight (bearish) positions on Indian stock markets, reveals a survey of fund managers by Bank of America (BofA) Merrill Lynch for the month of January.

The survey shows that emerging market fund managers are underweight (UW) on India by 21 per cent in January as against 18 per cent last month. The country is the largest UW bet in the Asia-Pacific region, followed by Australia (13 per cent). The most favoured market is Taiwan, with an overweight (OW) of 17 per cent, and Korea, with an OW of 15 per cent.

The biggest UW sectors for FIIs are defence utilities, telecom and health care. Among global emerging markets, UW on India stood at 35 per cent as against 30 per cent in December. The Indian markets underperformed between November and January, when inflationary pressure was felt the most. The Sensex benchmark declined over five per cent while the MSCI Emerging Markets Index of 21 developing nations’ shares gained over three per cent during this period. Though India’s food inflation eased to 16.91 per cent, it still is at levels that may keep pressure on the yearly headline inflation.

In contrast, a net 55 per cent of asset allocators say they are OW on global equities, the highest reading since July 2007. It represents a significant increase from December, when a net 40 per cent were overweight on this asset class. At the same time, bond allocations fell. A net 54 per cent are UW on bonds globally, up from 47 per cent a month before.

West looks better
The survey says the reason behind they being overweight on global equities is growing confidence in the global economy and corporate profits. A net 55 per cent investors expect the world’s economy to strengthen in 2011, with 39 per cent predicting “above trend” growth in the coming 12 months, the highest since the question was introduced in February 2008. A net 57 per cent believe corporate profits will rise 10 per cent or more this year, up from 45 per cent in December.

A growing majority expects global inflation to increase this year – a net 72 per cent in January, up from a net 48 per cent two months earlier. But higher inflation is not seen necessarily as a threat. A net 42 per cent investors believe monetary policy is “too stimulative,” fewer than in November.

“The combination of growth optimism and a benign view towards higher inflation provide a potent case for equity investment,” said Gary Baker, head of European equities’ strategy at BofA Merrill Lynch Global Research. “Investors believe monetary easing is working. In the absence of either tighter policy or weaker data, the equity enthusiasm looks contagious,” said Michael Hartnett, chief global equity strategist there.

The BofA Merrill Lynch Survey of Fund Managers is regarded as reliable by many, as an average of 160 fund managers participate in surveys covering global emerging markets. They manage assets worth $350-400 billion in the region.

A total of 199 fund managers, managing a total of $562 bn, participated in the global survey, held from January 7 to 13.