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Foreign portfolio investors’ allocation to India, compared to its weight in a key emerging market (EM) index, is at a record high.
The MSCI Emerging Market index is made up of a number of developing countries such as Brazil, India and others. Foreign investors who wish to invest in such markets often use the weight of each country in the index as a guideline to how much of their capital they should allocate to each. If they are particularly bullish on a country, they allocate more to it. This is called being overweight on a country (with respect to its index weightage).
A JPMorgan India Equity Strategy report authored by Bharat Iyer, Bijay Kumar and Adrian Mowat notes that such overweight positions on India have climbed to never-before seen levels.
"FIIs are now overweight on Indian equities by more than 400 basis points versus the benchmark (MSCI EM), a historical high. The positioning is reflective of the renewed faith in the growth potential but also poses near-term risks in the event of any significant global risk aversion," said the report, dated February 4.
Others have also pointed to the rising overweight positions. "India OW is at an all-time high for GEM (global emerging market) funds and the consensus bullishness creates the biggest risk to markets, in our view," said a Bank of America Merrill Lynch's India Equity Strategy report, put out on February 19 and authored by analysts Jyotivardhan Jaipuria and Anand Kumar.
Foreign investors are estimated to hold around a fifth of the total Indian equity market. They hold a little over 40 per cent of the free float, the shares available to the general public.
The MSCI Emerging Market index is made up of a number of developing countries such as Brazil, India and others. Foreign investors who wish to invest in such markets often use the weight of each country in the index as a guideline to how much of their capital they should allocate to each. If they are particularly bullish on a country, they allocate more to it. This is called being overweight on a country (with respect to its index weightage).
A JPMorgan India Equity Strategy report authored by Bharat Iyer, Bijay Kumar and Adrian Mowat notes that such overweight positions on India have climbed to never-before seen levels.
| BETTING ON INDIA |
Compiled by BS Research Bureau Source: Bloomberg |
"FIIs are now overweight on Indian equities by more than 400 basis points versus the benchmark (MSCI EM), a historical high. The positioning is reflective of the renewed faith in the growth potential but also poses near-term risks in the event of any significant global risk aversion," said the report, dated February 4.
Others have also pointed to the rising overweight positions. "India OW is at an all-time high for GEM (global emerging market) funds and the consensus bullishness creates the biggest risk to markets, in our view," said a Bank of America Merrill Lynch's India Equity Strategy report, put out on February 19 and authored by analysts Jyotivardhan Jaipuria and Anand Kumar.
Foreign investors are estimated to hold around a fifth of the total Indian equity market. They hold a little over 40 per cent of the free float, the shares available to the general public.
A February 5 Credit Suisse Securities India Market Strategy report, authored by research analysts Neelkanth Mishra, Ravi Shankar and Prateek Singh, noted foreign institutional holdings remain largely concentrated in the blue-chip universe, with the top 50 companies accounting for 73 per cent of their holdings.
“Room for FII (foreign institutional investor) flows still exists—$159 billion of room in companies with ADTV > $2 mn…That said, we do not expect market performance to depend on flows,” it said. ADTV refers to average daily trading volume. Foreign investors generally invest only in stocks which meet a certain liquidity criteria.
India has received more capital than most other EMs, in line with its performance. “The flows are likely to remain strong, as there is a lot of interest from institutional players. The ownership is only likely to go up,” said Vikas Khemani, president and chief executive officer, Edelweiss Securities.
Even the American central bank’s expected rate increase is unlikely to have a significant impact on India flows, according to Khemani. The US Federal Reserve is expected to increase interest rates in line with an improvement in the American economy. This, in turn, might have an impact on the amount of money which flows into EMs from institutions which based their borrowing on the prevailing low interest rate regime.
“India is likely to stand out among other EMs on account of the growth. One could see some re-allocation away from them and towards India on account of higher growth and flows could keep coming,” he said.
Foreign portfolio investors have been net buyers by Rs 21,608 crore so far this year. They held assets under custody of Rs 19.55 lakh crore, according to year-end regulatory data.
