Despite hurdles, foreign investors keep faith in India

Last Updated: Wed, Jun 20, 2012 19:51 hrs

In spite of macroeconomic headwinds, slowing growth and taxation-related worries, India remains a blue-eyed boy for foreign institutional investors (FIIs) as far as portfolio flows are concerned.

Portfolio investments in Indian stocks so far this year have been among the highest in emerging markets. FIIs have net-invested $8.5 billion in Indian stocks in the first half of this calendar year, more than in any other market, including Russia and Brazil.

Exact data on investment portfolio flows in Chinese stocks isn’t available. However, some research firms suggested these flows could be similar or maybe even less than India.

India has been one of the highest receivers of FII flows in 2012 ($ mn)
  2008 2009 2010 2011 2012*
India -12,918 17,639 29,321 -512 8,536
S Korea -36,641 24,659 19,800 -8,584 6,401
Thailand -4,942 1,137 2,687 -167 1,974
Brazil -24,630 20,597 2,978 -625 1,866
Russia 3,986 2,878 2,935 1,703 1,007
Philippines  -1,135 420 1,224 1,329 875
Indonesia 1,732 1,383 2,331 2,950 253
Taiwan -16,364 15,617 9,577 -9,074 -390
*Year till date                                                                              Source: Bloomberg

Flows into other BRIC nations have been muted, compared to India. Brazil has seen FII flows of $1.86 billion, while Russia has got a little over $1 billion. In Asia, South Korea has seen the second-highest flows at $6.4 billion, after India.

Ironically, these flows have been seen despite concerns like widening fiscal deficit, depreciating currency and downgrades by rating agencies.

Even as emerging market funds have seen continuous outflows of over $6 billion in the past four to five weeks, outflows from India have been relatively subdued. FIIs, who poured $9.2 billion up to April 4, have pulled out only $600 million since then.

“Even in difficult times, FIIs have been reluctant to sell India. This shows their considerable degree of faith in Indian markets,” said Saurabh Mukherjea, head of equities at Ambit Capital. “Big FIIs and long-only funds continue to back India and high-quality names, which generate good cash flows and have good promoter backing.”

“Foreign investors have been bullish on India until the Budget. However, GAAR and policy inaction has bothered potential investors. However, most FIIs have still not given up on India but are expecting favourable taxation rules and progress on the political front,” said U R Bhat, MD, Dalton Capital Advisors. “If there are negative surprises on these fronts there could even be accelerated outflows,” he added.

In the past, too, India has attracted more than its fair share of FII flows. In 2010, India had received its highest-ever FII flows of $29.32 billion, which again was higher than in most other emerging markets.

Even last year, when most markets saw huge outflows due to risk aversion among investors, FIIs net sold only half a billion worth of stocks in India.

FIIs preferred the Indian markets despite it commanding a valuation premium over other emerging markets. The premium is primarily on the back of India's high growth rate and superior return on equity (RoE).

However, some experts warn that slowing growth and policy logjam could impact India's corporate earnings, which could result in narrowing of valuation premium.

“India's macro mix is not very favourable any more for corporate profitability and will erode valuations. We don't think India deserves a significant valuation premium such as it enjoyed earlier. They will have to adjust lower,” Jonathan Garner, chief strategist (Asian and Emerging Market Equity), Morgan Stanley told Business Standard recently.

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