ETFs: India, China still entice global investors

As 2015 draws to a close, the volatility in global equity markets is likely to increase with the Federal Reserve all set to hike interest rates next month and commodity prices continuing their downward spiral.

Investment strategies adopted by foreign investors is of great interest in such periods, as these flows tend to determine the movement of stock prices.

A study of flows in to Exchange Traded Funds listed in the US provides a fair idea about the inclination of these overseas investors as investors from US account for more than half the global investor funds. Data show that investors have been pumping money in to the larger US-listed ETFs focused on India and China.

According to Bloomberg, the largest among the US ETFs that invest only in to Indian stocks iShares MSCI India ETF, which has assets of $3.5 billion, has received $1.9 billion since the beginning of 2015.

Expecting rebound Another large India-specific ETF, iShares India 50 ETF has received net inflows close to $153 million this year. This is despite the 10 per cent loss suffered by these funds since the beginning of January. Another large India ETF, WisdomTree India Earnings Fund has, however, witnessed outflows of $217 million.

Similarly, the largest China-focused ETF in the US, the iShares China Large-Cap ETF, that has assets worth $6 billion, recorded inflows of $756 million so far this year.

The second largest ETF investing in to China, iShares MSCI China ETF too received inflows of $768 million.

Experts believe that despite the sell-off in Asian equities in the summer, they are due for a rebound once a US rate hike comes through in the fall.

According to Vivek Misra, Asia Equity Strategist, Societe Generale: “India is one of the few EM (emerging market) economies where the OECD leading indicator signals improvements in the coming quarters. We are overweight Chinese shares listed in Hong Kong as we believe heightened fears of a hard landing in China will recede.” He thinks that some of the inflows in China ETFs could be due to reversal of earlier outflows.

Sanjay Sachdev, Executive Chairman & Co-Founder, ZyFin Holdings, concurs. “Emerging markets as a category have seen huge outflows this year due to a global commodity price collapse. As global demand shrinks in a deflationary environment, investors want to invest in countries that have a comparative advantage due to a domestic consumption led-economy. Therefore, India has been a big beneficiary.”

Foreign investors are also expecting further monetary easing in India and other Asian countries, thus making the equity in these markets attractive.

“We expect many central banks to ease policy in Asia, triggering improving liquidity conditions. However, growth prospects are still being downgraded, so the volatility regime of equity markets should remain somewhat higher than in the last few years,” adds Misra.

BRICS loses fancy While investors are taking country specific bets on India and China, BRICS as a group appears to have lost investor fancy.

The three US ETFs that invest in the BRICS countries together own just $368 million in assets.

Around $137 billion, accounting for 98 per cent of the assets, have been pulled out these funds since the beginning of 2015.

“The BRICS do not have the same common characteristics as they did about 10 years ago. Brazil, Russia and South Africa are victims of the global commodity meltdown due to reduced global demand. There has been substantial volatility in Chinese markets. That makes Indian with its stable government better placed,” says Sachdev.

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