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Will FII flows into Indian markets contract as the Japanese channel resources to fund resurrection of the quake- and tsunami-ravaged areas?
An analysis of portfolio flows out of Japan in recent years shows that Indian investors do not have much to worry on this score.
According to the International Investment Position (IIP) report published by the Japanese Ministry of Finance, Japanese investors have been reducing their activity in Indian stock market in the last five years. Indian investors too have largely ignored Japanese equity while allocating money in overseas stocks.
Japanese investors are known for their penchant for investing overseas and they form the third largest pool of investors after the US and the UK.
A report by International Financial Services, London, pegged the share of Japan at 6 per cent of the global conventional investment management assets in 2009.
Pension funds, mutual funds and insurance companies in Japan form this large fund pool that invests in an array of assets world-wide, including equities.
Dwindling share
But IIP report of Japan shows that share of India in outbound portfolio investment from Japan has been dwindling over the last five years. While in 2005 Indian equities received over Rs 8,000 crore from Japan, these investors pulled out around Rs 700 crore out of Indian market in 2010.
To put this figure in perspective, total FII flows in 2005 were around Rs 11,000 crore. That is money flowing into India from Japan accounted for over 70 per cent of the flows then. The situation has changed significantly since.
Outflow into Japan accounted for a fraction of the Rs 29,000 crore received in to Indian equities in 2010. This data suggest that while Japanese investors are withdrawing from Indian equities, the gap is more than made up by investors from other countries.
It is of course possible that the IIP report captures only money directly invested by Japanese investors in to India. Funds could be invested indirectly in to India through emerging market and BRIC funds or the exchange traded funds listed on exchanges such as Luxembourg, NYSE or Singapore.
Money routed through tax-havens to save tax would also not figure as investment in India.
Slowing investment
The IIP report also shows that Japanese investors have been going slow with their equity investments in overseas markets since last year. Portfolio investment overseas stood at Yen 55,298 billion towards the end of December last year.
This is only marginally higher than the investment at the end of 2009 at Yen 54,687 billion. It is possible that higher valuations in other markets and improving growth of domestic economy could have made these investors look inwards.
Japanese portfolio investments overseas recorded a high of Yen 65,376 billion towards the end of 2007, just before the global equity market crash of 2008. This figure shrunk 45 per cent to Yen 35,817 billion the next year. Investment overseas still remains 15 per cent off the highs recorded towards the end of 2007.
A definite shift out of Asia and into American equity markets was observed in Japanese outbound investments last year.
While net inflows into Asian markets was Yen 96 billion, American markets received Yen 1.3 trillion in the last calendar. European equity markets were also better favoured receiving about Yen 208 billion in 2010.
Japanese investment acumen is also apparent when we see that outbound portfolio investments spiked to Yen 6.4 trillion in 2008, the year when equity markets were crashing worldwide. This is twice as high as the outflow recorded in the previous year when the bull market was reaching a frenzied stage.
Indian investments
Indian investors have been indifferent to Japanese stocks in recent years. Inbound portfolio investment from India into Japan was zero between 2008 and 2010 reflecting that Indian investors have not taken direct exposure to Japanese equities in this period. Mild inflow of Yen 1.6 billion was recorded in 2007.
Japanese stocks received Yen 2.9 trillion in the last calendar as overseas investors once more started routing funds into developed equity markets. UK investors are the largest investors in Japan, followed by US investors.
Impact on India Inc
It would, however, be wrong to say that the recent catastrophe has no impact on Indian companies. The cost of rebuilding the destroyed areas and utilities is being pegged between $60 billion and $150 billion by analysts.
With such large expenditure scheduled for the next few years, the cost of capital is expected to go up, making overseas fund-raising more difficult for Indian companies. The other concern is the rise is commodity prices such as cement, iron and steel and so on used for reconstructing Japan.
Concerns are also being expressed about price of crude going up as new nuclear power facilities scheduled to come up over the next few years slow down their implementation if the present crisis in Fukushima Daiichi reactor develops into a full-scale nuclear disaster.
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