India gains as FIIs divert funds to emerging markets

With global investors shifting focus from developed to emerging markets in the last few days, India has emerged as a major beneficiary.

Since March 22, foreign institutional investors (FIIs) have net-bought Indian shares worth Rs 12,345.30 crore (Rs 123.45 billion), according to data from the Securities and Exchange Board of India. More than half of this, or Rs 6,749.60 crore (Rs 67.49 billion), has come in just six sessions ended April 7, data compiled by the BS Research Bureau show.

The surge in inflows on March 31, when FIIs invested Rs 3,300 crore (Rs 33 billion), was due to shifting of some funds from derivatives to the cash market on the expiry day, said the head of institutional equities at a domestic brokerage.

The last time such strong inflows came in such a short span was in early November last year, when the Bombay Stock Exchange (BSE) Sensex closed at an all-time high of 21,005.

Not surprisingly, the Sensex, which closed at 19,451.45 on Friday, has gained 9 per cent since March 22.

"For the last few months, investors were exiting emerging markets and deploying money into developed markets. The trend is reversing, with emerging markets becoming relatively cheaper," said U R Bhat, managing director, Dalton Capital Advisors (India).

"Despite oil prices rising, the macro situation in India is looking better, with interest rates peaking and the balance of payment situation likely to be better than expected, on the back of robust export performance," he said.

Net inflows into emerging market equities were $2.7 billion (Rs 12,150 crore) in the week to April 6, according to Lipper, the fourth-highest since the fund tracker began compiling this data in 1992.

"Following a 20 per cent rally since the announcement of second quantitative easing by the US at the end of August 2010, investors appear to believe that developed market equities reflect the positive outlook and emerging market equities are worth another look," Clive McDonnell, head of equity strategy at BNP Paribas Securities Asia, said in a note to clients.

"An additional factor is the improvement in valuations following the outflow of $25 billion from the emerging market equity universe in the first quarter of 2011," he added.

Several FIIs have changed their India stance in the last one month. Early this week, JP Morgan's Adrian Mowat, the Asian and emerging market strategist, upgraded India to overweight, citing lower inflation, normalisation of the yield curve and the progress on various legislation. After March 31, HSBC strategists have changed their India rating from underweight to neutral.

Some other influential foreign firms such as Deutsche, Morgan Stanley and Citi have also been optimistic in their India outlook.