Move over BRICs, here come the TIPs

While most emerging markets, including Brazil, Russia and China to Korea and South Africa, suffered a rout this year, the Indian stock market remained impervious to the mayhem. The Sensex has gained 4 per cent so far in 2014, while bellwethers such as Shanghai Composite (China), Kospi (South Korea), MICEX (Russia) and Bovespa (Brazil) have plummeted by 4-10 per cent.

In fact, decoupling from the wilting BRICs, India seems to have hitched its wagon to a new set of favoured markets — the TIPs. Thailand, Indonesia and the Philippines, along with India, have attracted the lion’s share of FII money and posted strong stock price gains in 2014. Indonesia’s Jakarta Composite is up 9.8 per cent, Thailand’s Se Thai sports a 4.7 per cent gain and Philippines’ PSEI has gained 7 per cent year-to-date.

Political refresh So what’s the common thread tying together the TIPs?

One is the hope of a ‘political refresh’, as brokers call it. Across these nations, recent events have strengthened hopes for a dramatic political change that will speed up reforms and growth. As the Sensex took wing on a ‘Modified’ rally, Indonesian markets have zoomed after popular Jakarta Governor Joko Widodo won a nomination to contest the Presidential elections this July. In Thailand, stock market gains have been fuelled by expectations that Prime Minister Yingluck Shinawatra may step down.

But then, quite a few emerging nations are set to go to polls this year, including South Africa, Turkey, Libya and Brazil. Why single out the TIPs? Institutional investors explain that FIIs haven’t preferred countries where the incumbent government is likely to return to power.

“Emerging markets need economic reforms,” says Nick Paulson-Ellis, Co-Head of Global Emerging Markets, Espirito Santo Securities.

Desire for change “Political regime change is seen as a key catalyst for reforms, hence the preference for India and Indonesia. Brazil, Turkey and South Africa also face elections, but with the near-certainty of incumbents returning to power, investors don’t see the required changes happening.”

Asked whether it isn’t tricky to bet on poll outcomes, he says: “Yes, there is risk and Indian elections have historically been hard to predict. But we see almost all scenarios as preferable to the incumbent government. Maybe the euphoria risks being overdone, the desire for change and expectation of better leadership and policy making are pretty rational.”

FIIs seek TIPs Data on FII flows support this view. While India, Indonesia, the Philippines and, more recently, Thailand have attracted new FII money, South Korea, Mexico, Bulgaria and Poland have seen pull-outs.

Among emerging markets, Indonesia has topped the charts with FIIs pumping in $1.98 billion in 2014, closely followed by India at $1.75 billion. Thailand saw inflows turn positive at $168 million last month with political unrest easing. The Philippines too is a part of this cosy club, not due to the prospect of political change, but because of its improving fundamentals, players explain.

Apart from politics, a strong currency, improving current account deficit and declining inflation seem to be the other factors linking India to the TIPs. Explaining that there were fundamental reasons for this rally, Rahul Bajoria, Regional Economist, Barclays, notes: “The Sensex has been one of the best performing indices this year. This rally has been dominated by stocks which benefit from an external pick up in demand such as IT and pharma. Lower inflation, a manageable current account deficit and improving currency fundamentals have contributed too.”

While Indonesia’s rupiah is up 6.5 per cent against the greenback, the rupee and Thai baht are up 1.26 per cent and 0.99 per cent, respectively. South Korea’s won, South Africa’s rand, Russian rouble have all lost value against the dollar. Of course, limited trade with China, which is embroiled in problems due to rising loan defaults, is the other significant variable that India shares with the now hot TIPs.

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