Capital counter: Outflows on

Poor macro-economic numbers from the US trigger large ETF outflows.

From an equity markets point of view, this year has been rather complicated. After seeing inflows of $29 billion in 2010, Indian equities started correcting from January on expectations of fund rotation from ‘expensive’ emerging markets to developed markets such as the US. The rationale was simple: the second round of quantitative easing was expected to trigger growth, by making cheap funds available to corporate America. Not surprising then that developed markets outperformed emerging markets.

But six months down the line, the picture looks very different as last week’s economic data for US has come in weaker than expected. Consequently, sizeable amounts of money, which had flowed into US equities through exchange traded funds (ETFs) chasing the QE2-led growth, have begun to flow out. US ETFs witnessed outflows of $16 billion last week, largest since May 2010, claim analysts. Interestingly, in the same period, other markets too have seen outflows — China ($883 million), Canada ($745 million), Russia ($691 million) and Brazil ($467) — but the magnitude has been lower.

India dedicated ETFs	Jun 2 2011	9-Jun 2011	Week-on- week chg
Wisdomtree Earnings India	1,418	1,323	(95)
iShares MSCI ETF India	891	821	(70)
Powershares Portfolio India	571	520	(51)
iShares S&P Nifty 50 India	226	216	(10)
Market Vectors S/C India	69	63	(6)
Emerging Shares INDX Global	86	80	(6)
Direxion Daily 2X Share India	33	30	(3)
DB X-Trackers CNX Nifty S&P	373	376	3
Lyxor ETF MSCI India	284	288	4
Source: Quant Global Research Figures in $ mn

After seeing inflows in the last week of May, redemptions resumed from Emerging Market Equity Funds (EMEF) in June, after disappointing macro data from US. However, last week’s outflows ($222 million) are fairly small compared to inflows of $820 million in the past week. Indian ETFs, too, saw outflows of $228 million last week, largest since February 2011, taking the total outflows in the past six weeks to $745 million. What does this mean for Indian equities? Global investors have been underweight on India since last November. This has not changed, even as developed markets have fallen out of favour. The recent weakness in developed markets resulted in outperformance among emerging markets (EM). If developed markets start showing strength now, the structure of EM underperformance will perhaps be reasserted.

For Indian equities, however, trends have started tightening. According to Quant Capital, “While rallies were unable to progress after the short-term overbought, declines were also getting arrested after the short term oversold. Short-term support is near 5,470, while resistance is near 5,545. A break near 5,470 can result in a quicker drop in the zone of 5,450-5,470, where the structural support would be retested.”