Since the start of 2013, the Dow Jones Industrial Average is up 10.25 per cent while the Sensex is down 3.74 per cent. The reasons behind both the upmove in the US and the downswing in domestic equities are well known. After several years, US economic data is showing promise - home prices are up, unemployment is down and retail sales are improving. Hedge funds are now buying real estate in the US as rental yields are at five to six per cent, while borrowing costs are no more than two per cent. Though Europe is still not out of the woods, a large part of the developed world woes have been addressed, it seems.
Evidently, this would have an impact on Indian equities. Some funds have already announced that they are cutting their overweight position on India to allocate more funds to developed markets. Strategists are calling this the great rotation, where funds will see a major churn as reallocation happens across geographies, markets and asset classes. Emerging markets have underperformed US benchmarks as the greenback has also strengthened. In the last three months of 2012, most emerging economies performed well but since January this trend has reversed. Chris Wood of CLSA says: "The best explanation for China's and emerging markets' related failure to perform is that, at the margin, Chinese growth appears to be slowing…" While there is some talk on funds cutting their overweight position on India, Ambit Capital believes capital flows are not about to dry up for India as there will be a reallocation from bonds to equities. India should benefit from this risk-on mood.
Another factor that would work in favour of India is investors' disenchantment with China and the known risk factors for India. Of all the BRICS economies, analysts say India's risks are out in the open, unlike other economies, like China or Brazil. Analysts say there is no clarity on the exact nature of the stress in China's banking system. The lack of any fiscal stimulus to rev up the economy is also leading to some disappointment. All these factors could benefit India. Saurabh Mukherjea of Ambit says: "More emphatically than any time in the past three years, new FII money is entering Indian equities." It appears that there are a lot more India-focused funds and emerging market funds that want to now look at Indian equities. From time to time, immediate triggers could change the short-term direction of the market, but overall Indian equities are likely to remain in positive territory. Mukherjea believes that as concerns regarding the "Chinese miracle" are growing and "given that the common adage of 'Indian/
Chinese GDP data being under/overstated' is now well established, the 'India vs China face-off for FII flows' theory should be put to rest."