A large part of the selling in Indian equity markets has come from domestic players, including retail investors. As worries mount on whether foreign investors would also pull out, Cameron Brandt, director of research, EPFR Global, which tracks foreign fund flows across markets and different asset classes, says there are redemption risks. Edited excerpts of an interview with Jitendra Kumar Gupta:
With hedge funds and foreign institutional investors (FIIs) reporting losses, do you see risk of redemption?
In this climate, certainly, there is a risk. But the question remains, as it has for much of this year: Where to go if you do pull out of emerging markets’ equities? Most ‘safe’ investments are returning under three per cent, US money market funds are currently paying 0.02 per cent at the moment and local currency emerging markets debt – a popular alternative this year – now carries greater currency risk as major issuers switch back to the easing mode.
How do you rate the risk of aggressive FIIs selling Indian equity? What could cause a sell-off?
Currently, retail investors are the ones pushing to exit their Indian positions, creating some buying opportunities for institutional players. While a lot is unappealing about India’s macroeconomic story at the moment, the elements are well known and many -– corruption, a recurring fiscal deficit and the slow pace of reform – have been issues for some time. For institutional investors, it remains a market with defensive characteristics and great, albeit unrealised, potential. That said, a sharp spike in oil or food prices could trigger a selloff by FIIs, as faith in the ability of Indian policymakers to cope is at a low ebb.
What does 2012 hold for the Indian markets when it comes to FII inflows?
If the euro zone comes up with a credible plan, Indian policymakers at least ‘do no harm’ and the Middle East doesn’t throw up a major crisis, then India could see some solid FII flows. FIIs want to put money to work, and increased exposure to emerging markets remains a cornerstone of many medium-term strategies. But, given the number of variables at play, the more likely scenario is another choppy year, with flows changing direction sharply and capital preservation trumping capital growth.
What are the key concerns FIIs have in India?
The biggest is the government’s impotence. While expectations for reform were pitched low from the start, its inability to address well-flagged challenges to the Indian economy suggests it won’t be able to handle some of the big shocks, such as break-up of the euro zone, that could surface in 2012. The U-turn on liberalising the retail sector despite the political and social costs of high food inflation was particularly damaging.
Are FIIs expecting more correction in the India markets?
They certainly see a risk, or series of risks, that it could happen.
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What sectors are attracting foreign money? Are they still mainly defensive ones?
Defensive Indian sectors have suffered smaller outflows than the more growth-oriented ones. When flows are expressed as a percentage of assets under management, however, utilities fare badly. A reflection, I think, of the current lack of faith in the government.
Why the sudden demand for the dollar despite the issues in the US? How is foreign money looking at the developments in the US and Europe?
The US is not doing well by the standards of the recent past, but it is doing a lot better than the euro zone and Japan and investors are responding to the warming trend in recent macroeconomic data. As for euro zone, year-to-date fund flows suggest investors expect very different futures for Germany and the rest of the currency union. Faith in the ability of the euro zone to get on top of its problems is also eroding, with the post-summit relief rallies getting shorter and shorter.
Among the different asset classes (debt, precious metals and commodities), where is the foreign money flowing and why?
The cumulative flows for the fund groups that have attracted fresh money year-to-date indicate that safety is the main driver, with some nods for yield.
How is India’s weightage among emerging market funds and global market funds? Is that going to change and why?
India’s average weighting among the two major emerging markets fund groups has been creeping up over the past six years, declining steadily among the smaller universe of BRIC funds and bumping along at low levels among Global Equity Funds. With diversification generally a favoured strategy among investors during bumpy periods, I don’t see huge changes to these patterns, unless there is a compelling need to rotate out of another major emerging market.