Investors who have spent time in front of their trading terminals exulting in the market rally and those who have seen their stock picks deliver strong returns over the last six months, need to be thankful to foreign portfolio investors (FPIs).
For these investors are the force behind the rebound from the depths recorded in March.
A lot has been written about the manner in which central bank stimulus created surplus liquidity which found its way into stock markets through the FPI route. But what may surprise many is that FPIs have not been pumping money into all emerging markets in an indiscriminate manner.
In fact, they have preferred Indian and Chinese equity during the pandemic, even as they withdrew from many other emerging markets.
The destiny of Indian and Chinese stock markets had been closely entwined in the first decade of the millennium as foreign investors turned gung-ho about the two economies that were growing at a scorching pace.
This link weakened considerably after 2015, when Chinese stocks first went on a roaring bull-run, followed by a resounding crash, from which they haven’t recovered yet.
The two countries seem to be renewing this link once again.
Outperformance of India, China
If we look at the performance of the global benchmark indices during the pandemic, India and China have been among the outperformers. While the Indian benchmark, the Nifty 50, is close to surpassing the pre-Covid peak, China’s Shanghai Composite Index is currently trading 4.7 per cent above this peak. The only other market that has been this buoyant is the US market.
The Chinese stock market was the first to recover from the initial bout of selling this year. With data released by the Chinese government indicating that the pandemic was under control in the country, the Shanghai Composite Index had moved to a new 52-week high by July.
The Nifty 50 has also been rallying strongly, despite the gloom surrounding corporate earnings and economy; it is currently around 5 per cent below January peak. Many of the US indices such as the Nasdaq Composite (15 per cent above pre-Covid peak) and the S&P 500 that was 5 per cent above its 2020 peak in early September, have also managed to put up a good show.
However, stocks in many other markets have not done this well. For instance, the CAC index of France, FTSE 100 of UK, Russia’s RTS index, Brazil’s Bovespa index and Indonesia’s Jakarta Composite index are at least 20 per cent below the pre-Covid peaks.
Driven by FPI flows
What is the connecting link in the Chinese, Indian and US market rallies? It is FPI flows. FPIs have taken a more favourable stance towards India, China and the US, going by the latest data put out by Bloomberg.
These investors had net purchased Indian stocks worth $4.07 billion year-to-date, up to September 29, 2020. Of this, around $6.5 billion had been infused between July-September, negating the outflows recorded in March.
Foreign portfolio flow data for China is available only until June 30. But the country had already received $47 billion in the first six months of 2020. Nearly $78 billion of inflows were recorded in the June 2020 quarter, probably because foreign investors found the prospects of China better compared to other countries in the initial months of the pandemic.
The US stock market received the maximum FPI inflows of $135 billion, between January-July 2020. The rising uncertainty caused by the pandemic would have made investors move money back to the safe haven of dollar-denominated securities. The ‘home country bias’ would also have kicked-in, since the country of origin of more than 50 per cent of global portfolio funds is the US. Most other countries including Indonesia, Japan, Malaysia, the Philippines, South Korea, Taiwan, Brazil and Canada have recorded net portfolio outflows this calendar. This shows that FPIs did not favour all emerging markets during the pandemic.
Why the flows?
Then why did money flow into India and China? The answer appears to lie in the speed of economic recovery expected in the two countries. As the pandemic progressed and movement restrictions continued, revised growth projections are getting bleaker. OECD projects GDP in all G-20 nations to contract between 3 and 12 per cent in 2020.
The only exception is China, which is projected to grow 1.8 per cent this calendar. The OECD projections for 2021 however show that while the recovery in most nations is expected to be tepid, under 5 per cent, India and China are expected to outperform. While China is projected to grow 8 per cent, India is expected to grow faster — at 10.7 per cent — in 2021. This is far above the projected growth of 5 per cent for the world and 5.7 per cent for G-20 nations. It is quite possible that the speedier recovery in China and India is attracting foreign investors. Besides this, the demographic advantage enjoyed by both the countries, with a large domestic consumption market and a younger population that is expected to go back to pre-Covid level of activity faster, could also be working in favour of the countries.
Implications
Foreign investor money that has entered the stock market due to the relatively superior growth prospects of the country is not expected to exit in a hurry. This is good news for all the newbie investors who have piggy-backed on institutional investors to ride the rally over the last few months.
It also means that price corrections, if any, will not get too deep as both foreign as well as domestic investors are willing to bet their money on India.