Foreign institutional investors (FIIs) operating in the Asia-Pacific region continue to be underweight on the Indian market, according to a latest survey.
The survey, which covered 30 long-term funds, including hedge funds, found that less than 5 per cent of FIIs were overweight on India. However, all the 30 funds were overweight on China as it is perceived to be fiscally stronger. Also, there are worries about the upcoming general elections in India.
In the last two months, the BSE Sensitive Index, or Sensex’s, price earnings (P/E) ratio has fallen from 9.85 to 8.65. The Chinese Shanghai Composite’s P/E has risen from 14.12 to 16.37.
Also, most macro-economic numbers for India have shrunk back to the level when in 2003, when the ‘bull run’ had just started gathering steam. In the September-December quarter, the gross domestic product (GDP) growth of the country is at a six-year low of 5.3 per cent. Corporate earnings have receded to five-year lows, while the rupee-dollar exchange rate is at an all-time low to the dollar.
But the main problem is the nation’s fiscal deficit. The projected fiscal deficit for financial year 2008-09 is 6 per cent – a six-year high. This led Standard and Poor to downgrade India’s sovereign rating to negative.
The market-capitalisation to GDP ratio has also fallen from 1.36 in early 2008 to just half of that, reflecting the mayhem in the equities market.
“Even the geopolitical scenario, which was improving six years ago and, as a result, had laid the foundation for the ‘bull run’, is worsening again in the Indian sub-continent,” said a senior executive with a leading FII. Relations between India and Pakistan have worsened since the 26/11 Mumbai attacks.
According to the survey done by India Infoline, FII fund managers continue to be underweight on beaten-down sectors like technology, real estate and cyclical stocks like metals.
The survey found that 67 per cent of funds were underweight or had taken short positions on technology, whereas 40 per cent of funds were underweight on real estate and cyclical commodities. The main concern about technology was reduction in client budgets in FY10 and expectations of an appreciation in the rupee’s value. Given this backdrop, FIIs were cautious about India’s prospects.
The good news is that many FIIs believe in the long-term story. Manishi Raychaudhuri, head of research at BNP Paribas Securities India, said in the firm’s latest India strategy report that the near-term was clouded by potential job losses, decline in infrastructure spending and corporate capex, rising fiscal deficit and uncertainty over the general elections.
“However, we believe India will be a key beneficiary of the structural drivers of demographic dividend, rising affluence and rising urbanisation,” the report pointed out.
India Infoline’s survey, however, found that more than 80 per cent believed that crude oil would behave differently from other commodities and rise from here on. Almost half of the fund managers (50 per cent) expected crude oil at $40-$50 per barrel in the next six months, while another 30 per cent expected it to go above $50.
In the wake of these findings, the main question for investors is the position they could take in the present market conditions.
Bharat Agrawal of India Infoline’s institutional sales team said: “We believe that this could be the time to take a contrarian call as, historically, contrarian bets have made money. That implies that, if we were contrarian, we would aggressively buy India with a double overweight position on information technology.”
