India Economy

Investment Nuggets: A ‘market of one’

| Updated on August 25, 2012 Published on August 25, 2012

Despite all the idiosyncratic factors that are seemingly hurting India, such as weak growth and stubborn inflation (aka stagflation), high interest rates, and so on, India’s equity return correlations with the rest of the world are rising and close to record highs.

The market remains hinged to global outcomes more than ever before. Of course, this phenomenon is not unique to India. We remain in a “market of one,” to borrow a phrase coined by Henry McVey, our erstwhile US strategist.

India’s beta is not high, relatively speaking. India ranks 9th out of 21 countries in the emerging market (EM) index on beta — its current 12-month trailing beta is just under one versus the MSCI EM index measured using weekly returns. India’s relative volatility ranks 9th in the EM pecking order, behind both Brazil and Russia.

Even though India ranks similarly on correlations, the fact is that absolute return correlations are at multi-year highs — the key reason why India’s beta is higher than historically.

This is counterintuitive, but it tells us that as far as market performance is concerned, global outcomes are more crucial than idiosyncratic factors. Of course, another way to interpret this data is that the idiosyncratic negatives are in the price without exerting influence on prices anymore, whereas the positives are still not strong enough to dampen India’s return correlations with the rest of the world.

Morgan Stanley Research

Why are FIIs buying India?

Till early August, FIIs bought (net) $10.7 billion of Indian equities — the highest ever on a year-to-date basis. Even the heady days of 2007 or 2010 did not see such inflows over the same period. This accounts for 62 per cent of all flows into Asia-6! It seems FIIs prefer India to almost any other Asian market.

More than 50 per cent of the flows have come from Asia ex-Japan funds and global emerging market (GEM) funds. We estimate that both Asia ex-Japan and GEM funds have gone overweight on India by 0.5-1 per cent. We believe that’s because of India’s relative earnings stability.

Over past one to two quarters, Indian earnings estimates have remained stable while those for large Asian peers have declined 7-10 per cent.

Asia ex-Japan funds appear to be investing significantly above their weight in India; so are GEM funds (11 per cent of incremental inflows in India versus India’s benchmark weight of 6.9 per cent) — but to a lesser degree.

The answer to this riddle lies in the kind of stocks that FIIs have bought in India recently. Over the past two-to-three quarters, FIIs have bought predominantly stocks that offer visibility on revenues and earnings. The top 15 stocks, contributing 65 per cent of FII buying, fall largely in this category.

In contrast, in 2008, FIIs sold Indian stocks heavily when they sold rest of Asian stocks. Prior to this, in 2007, they bought high beta real estate, infrastructure and commodity stocks.

FIIs have largely bought ‘safe’ stocks. We believe only stock-specific disappointment could lead them to sell these. Cairn, SBI and some IT stocks could fall in that category. In case FIIs sell, support could come from DIIs who are sitting on $ 11-12 billion in cash and have acted as the backstop to FII selling in the past five years.

BNP Paribas India Equities Research

Published on August 25, 2012
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