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FII outflows: Who is stealing India’s thunder?

LiveMint logoLiveMint 15-09-2017 Harsha Jethmalani

Global fund managers increased their emerging markets (EMs) overweight position to a net 47% in September, up from a net 39% overweight in August, according to the latest Bank of America Merrill Lynch survey (see chart 1). On the other hand, they increased their underweight stance on the US, while the overweight position on European equities declined.

Graphics: Naveen Kumar Saini/Mint

How does the increased overweight to EMs, a seven-year high, square with the fact that foreign institutional investors (FIIs) have been on a selling spree in Indian equities?

FIIs were net sellers in Indian equities in August and continue to remain so. This is at a time when key Indian indices are scaling new highs every other day. Expensive valuations coupled with fears of delayed earnings revival and uncertainty about the impact of the goods and services tax on the overall economy are some factors. A strengthening rupee against the US dollar may have also prompted the outflows, point out analysts (see chart 2).

Some analysts say that since the Indian equity market has run-up significantly, investors may have taken some money off the table, especially in the wake of geopolitical risk looming from North Korea.

Some other EMs have also been witnessing FII outflows since August, showed Bloomberg data.

If not India, where among EMs is the money going?

EPFR-tracked Emerging Markets Equity Funds posted inflows for the 32nd time in the 36 weeks year-to-date during early September, said a note released by EPFR on 7 September. Among Asia ex-Japan Country Funds, both Korea and China Equity Funds recorded solid inflows. “In the case of the former, the depreciation of the won— partly in response to North Korea’s threats—have made Korean stocks cheaper for foreign buyers and improved the competitive outlook for Korean exporters. China Equity Funds, meanwhile, are benefiting from the government’s focus on financial stability, improved corporate earnings and the possibility that the Communist Party Congress next month will set the stage for deeper structural reforms,” added the note.

According to a recent Morgan Stanley report, MSCI China, Hong Kong and Turkey reported the highest net income beats, with net positive earnings breadth in the June quarter. The brokerage firm continues to prefer the equity markets of China, India and Japan to broader Asia ex-Japan markets.

Meanwhile, Indian equities continue to outperform other asset classes in the country. But with earnings recovery unlikely to happen in the current fiscal year and the rupee expected to strengthen further, FII outflows from Indian equities may continue.

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