 "Foreign investors make a strong comeback")
Between 2012 and 2014, the Indian equity market cornered a large portion of the foreign flows that went into emerging markets (EMs). So, too, for the large part of 2015.
However, in the first half of this calendar year, several smaller markets, including Brazil and Mexico, have attracted more from abroad than we did. Bloomberg data show India got foreign institutional investor (FII) flows of $2.8 billion so far in 2016. In comparison, South Korea's was $3.6 billion, Taiwan $5.3 billion and Brazil $3.3 billion. Mexico had got $2.1 billion till end-March and the tally has increased.
What has caused the dip in India's share? According to experts, active fund managers have been pruning their overweight stance on this country since the start of the year. "We have seen normalisation in India's weights. Active managers were five per cent overweight India versus the benchmarks last year. This has come down to 3.5 per cent. Incremental flows are going into other geographies," said Saifullah Rais, quantitative analyst at Kotak Institutional Equities.
Typically, fund managers peg their investments to global benchmarks like the MSCI EM or MSCI Asia ex-Japan. India's weightage in the MSCI EM index is around 8.5 per cent, below South Korea (14.7 per cent), Taiwan (12.2 per cent) and Hong Kong-listed China shares (25.9 per cent). India's market capitalisation is higher than South Korea and Taiwan but their weightage is more, due to high free-float market cap.
Passive or ETF (exchange traded funds) invest on these index compositions. It means every Rs 8.5 of Rs 100 of passive flows into EMs gets invested in India. Active fund managers, however, take an independent investment call, depending on the prospects of a particular market. The 'most preferred market' tag from 2012 to 2014 saw the Indian markets get higher flows than South Korea or Taiwan.
Since last year, however, some fund managers were seen scaling back their India weight, due to its relatively high valuations and lack of earnings support.
In the second half of 2016, relative flows into India could improve, as some of the foreign brokerages are again upping their India exposure due to an encouraging macro and earnings surprise during the March quarter. U R Bhat, managing director, Dalton Capital Advisors, said the Indian market continues to remain attractive in the eyes of global investors, as other markets in the region have their share of problems.
"Despite successive droughts, with months of decline in exports and economic slowdown, India has got a fair amount of foreign inflows. Some investors, however, have scaled back as the post-election euphoria in 2014 has subsided," he said.
How the markets and the rupee reacts to Raghuram Rajan's decision to not continue as the RBI governor when his term ends in early September and who is successor is, will have an impact on foreign flows, said experts.
Besides that investor appetite will also be driven by the outcome of global events like the British vote on remaining or not ('Brexit') in the European Union.
However, if early signs of recovery in the economy and earnings sustain, India will again start attracting higher flows than its peers.
Experts said investor risk sentiment might improve if the outcome of events like the British vote on remaining or not ('Brexit') in the European Union is favourable. Also, if early signs of recovery in the economy and earnings sustain, India will again start attracting higher flows than its peers. "Post the Brexit vote, we should see an improvement in flows. If we get a good monsoon, the India story will be rediscovered," said G Chokkalingam, managing director, Equinomics Research and Advisory.
