The Hindu Business Line : FIIs turn off Indian stocks to havens closer home

Chennai, June 27 Foreign institutional investors (FIIs) have turned net sellers in Indian stocks after being consistent buyers over the past couple of months. The recent selling appears to be triggered by profit-taking by overseas investors, as they re-balance their portfolio in favour of safer avenues back home.

Rising bond yields and expectations that interest rates will edge up again may also have reduced the FII appetite for Indian stocks, market participants and fund managers feel.

After pumping in Rs 24,837 crore into Indian stocks between mid-April and end-May, FIIs have been net sellers of equity worth over Rs 3,670 crore ($757 million) in the last two weeks.

The recent FII selling in India coincides with signs of emerging markets as a class witnessing outflows the past few days after receiving steady inflows for several weeks.

With the 81 per cent Sensex gain since March pushing up prices across the large-cap space, valuations have become rather stiff especially compared with the developed markets. “The valuations of most markets have clearly run ahead of the fundamentals with most emerging markets now trading at 15-17 times the 2010 earnings, up from 7-10 times in the beginning of March 2009,” says Mr Sandip Sabharwal, CEO, PMS, Prabhudas Lilladher Markets.

Moderation in risk appetite

The recent round of FII selling may also have been driven by a moderation in the risk appetite of global investors after gorging on them. That has probably prompted investors to take some money off the riskier markets, and head to safer avenues such as money market funds.

That conclusion is supported by the latest data released by fund tracker EPFR Global, which notes that global investors appear to be reallocating from emerging market stock funds to US money market funds.

For the week ended June 25, while investors pulled out a net $1.87 billion from Asia (ex-Japan), Latin America, EMEA and the diversified Global Emerging Markets Equity Funds, Money Market and US Bond Funds absorbed $25.9 billion and $1.72 billion respectively.

Mr Andrew Holland, CEO-Equities, Ambit Capital, says: “We have to note that there’s already been a huge run-up in the emerging markets. That may explain the flight of capital as there could be a feeling that emerging markets may have, in the short term, already run their course. Besides, the sell-offs may have been led by some investors taking profits.”

Factors such as a spike in government bond yields globally (which make he instruments more attractive) and the substantial reduction in the cash lying on the sidelines may also pause the fund flow into the markets, according to some fund managers.

“Government bond yields have firmed up globally over the last few weeks driven by fears of huge borrowings and high fiscal deficits. The rise in these bond yields is likely to lead to interest rates stabilising at higher levels, despite the global economic outlook. As such, a combination of low cash and low inflows should be near-term negative,” says Mr Sabharwal, who believes that the markets have turned technically ‘overbought’ in recent weeks.

He also cites reports of over $10 billion planned to be raised by IPOs and QIPs, creating a huge supply of paper.

FII flows over the long term

However, he does believe that India is well placed to attract FII flows over the long term.

“As economic growth accelerates and tax compliance improves over the next few years, fiscal deficit will come under control. FII flows into India will continue to be strong, however there will be volatility in the flows as the assets get reallocated on a continuous basis depending on valuations and returns available from alternative investment opportunities,” he says.

India may also get its fair share of inflows by way of increased allocations made to BRIC (Brazil, Russia, India and China) countries as “the group will continue to hold the interest of long-term investors”, says Mr Holland.

Corroborating this, the dedicated BRICs Equity Funds, as tracked by EPFR Global, continued to extend their winning run last week despite the fund outflows from emerging markets.

All this suggests that it may be early to talk of a reversal in fund flows, but the trend does call for greater caution on the part of retail investors.

Related Stories:
Retail investors stay longer than biggies in equity funds
Overseas investors pare down derivative positions
Select stocks hit new highs in recent rally
Wealthy investors still risk averse: Barclays report

More Stories on : Foreign Institutional Investors | Stock Markets

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