Foreign flows into Indian markets hit lowest in 13 weeks: Blip or a trend?

NEW DELHI: Investors continued buying India-dedicated funds during the week ended April 1, extending the inflow streak to 15 straight weeks, global investment bank HSBC said in a report.

However, the pace of buying India-dedicated funds reduced to its lowest level in the past 13 weeks, receiving just USD18m compared to a weekly average of USD400m so far in 2015, said the report.

Active investors were net sellers while passive investors continue to remain positive on India, albeit at a slower pace. HSBC is of the view that the marginal decrease in allocation to Indian equities by global and regional funds probably reflects minor shifting away from regional emerging market funds to global emerging market funds.
EM equity funds registered a fourth week of continuous outflows in the week ended April 1. Among the fragile five and BRIC countries, India saw the highest inflows while China and Brazil saw the highest outflows.

Well, this is something which global investment banks have been talking about for quite some time now. Given the fact that India remains an overweight in most of the global emerging market funds, the threat of redemptions also increases.

However, the concerns are short term and the long-term story still remains intact. “Indian stocks’ valuations look stretched only from a short-term perspective,” says Jim Walker, Founder & Chief Economist, Asianomics Group.

“But from a 5-10 years’ view, Indian equities are incredibly cheap. That is the way global investors should be looking at them,” he adds.



Slow pace of economic recovery, muted corporate earnings growth are some of the factors which have made foreign brokerage houses nervous at least in the short term. They also see the Indian markets at the risk of foreign outflows to other EMs.

On Tuesday, UBS in its latest report said that India is the most crowded trade among emerging markets based on foreign investor flows - UBS analysts Howard Park and Geoff Dennis wrote in the report.

Foreign institutional investors, key to Indian shares hitting record high last month, have invested $5.9 bln so far this year, as per NSDL data. FIIs bought the Indian stocks worth $16.1 bln in 2014.

UBS says other crowed EMs include Qatar, UAE, Russia and Taiwan. And the least crowded are markets like Egypt, Korea, China, Colombia and Turkey.

Many brokerages have even started to cut down the Sensex targets due to slow pace of economic recovery. They expect the sluggishness to continue for the next few quarters before some positives emerge.

The hope rally that began with Narendra Modi becoming the Prime Minister of India now seems to be at its fag-end. Macquarie has cuts the Sensex 2015 target to 31,600 from 33,000 as it cut the benchmark's FY16 EPS estimate to Rs 1,780 from Rs 1,820. According to agencies, Macquarie’s new Sensex target reflects 'slower recovery'.

CLSA, an Asian brokerage and investment group last week, has said the interest of foreign institutional investors in India is nearing a short-term peak due to the lack of market triggers and heavy overweight positions.

Although India's structural story remains compelling for long-term investors, the risk of a near-term pullback is rising, say experts.