New York: Mark Twain once said, in response to a mistaken publication of his obituary that “reports of my death are premature and greatly exaggerated.” The same could be said of the Indian stock market which opened up 1.10 percent on Friday morning and saw some strong foreign investor interest.
True, the Indian markets have been whipsawed this month in the risk-off trade in response to elevated threats from low oil prices and slumping China, but foreign investors now see a real opportunity to come in and start buying beaten down Indian stocks.
India's market may have lost some of its Modi mojo, but it still looks healthier than its emerging market peers. Falling oil prices have slashed India's import bill and boosted growth to an already-solid 7.4 percent over the last quarter making it the world’s fastest-growing major economy. Global fund managers are confident India’s underlying economic fundamentals are stable even though the global slowdown has hit Indian exports and might require policy to be more accommodative.
Japan's top brokerage Nomura Holdings says every $10 per barrel fall in oil price can lift India's GDP growth by 0.1 percentage points, lower CPI inflation by about 0.2 percent and improve the current account balance by 0.5 percent of GDP.
India safe bet among emerging markets
Crashing oil prices have put oil-producing emerging markets like Brazil and Russia on the ropes, but U.S. fund managers say consumer EM nations like India will find their stock markets intact — and even end higher in 2016.
"Emerging markets fall into two different groups — producers and consumers. Key producers continue to struggle, such as Brazil and Russia. These markets are going to remain challenged in the year ahead," Morgan Creek Capital Management’s Mark Yusko said at the "Inside ETFs" conference in Florida.
But consumer nations such as India “enjoy the tail winds of lower inflation and higher growth courtesy of lower commodity prices.”
India's inflation has fallen from double-digits to less than 6 percent over the past two years, as the slump in commodity prices fueled disinflationary pressures and allowed the Reserve Bank of India to cut rates by 125 basis points to 6.75 percent in 2015. The RBI is expected to cut interest rates just once in 2016, but RBI Governor Raghuram Rajan can be trusted to cut rates more aggressively if inflation rises above the bank’s target.
“India equities are cheap,” added Yusko. “India will be the greatest story on the planet 10 years from now. Start buying now.”
U.S. fund managers continue to look East for higher yields.
"Over the long haul, I view much of the news and the apparent crisis of the month to be a lot of noise. India is not going to blow up," Seth Freeman, CEO and chief investment officer at San Francisco-based EM Capital Management LLC, told Firstpost.
"Unfortunately, reforms move very, very slowly and not in a straight line. Foreign investors have to accept this as part of the fun. If you like the business story and fundamentals of an India large cap company, consider now to be a nice dip," added Freeman, whose earlier U.S. listed India-dedicated mutual fund owned both large and mid-cap Indian companies.
Too high a reliance on foreign investors
India’s growth and pro-business prime minister haven't been able to offer protection against a worsening global sell-off precisely because India’s stock market relies too heavily on foreign investors. Domestic Institutional Investors (DIIs) own around $60 billion worth of shares, according to ICICI Prudential Asset Management Co. In contrast, foreign investors own $285 billion-worth of the country’s listed shares.
"In terms of the pool of investors, I remain concerned that foreign investors represent such a large percentage of the Indian equity markets and particularly on a net investment basis. There has been a positive trend of greater DII participation. This is fantastic and critical for long term growth. Year to date, however, new sales of foreign investors have completely wiped out the net increase of DII's," said Freeman.
Global fund managers have pulled $1.6 billion out of Indian equities so far this year, reversing much of last year’s $3.75 billion in inflows. According to analysts, much of the selling has come from sovereign-wealth funds based in the Middle East and other oil producing countries.
"On a five year basis, over six times more foreign money has come into the market than from DII's. India's dependency on foreign flows is not healthy for the long term and with the advent of index based investing, can have the impact of either sucking up liquidity available for DIIs or cause excess volatility that hurts sentiment," said Freeman.
The selling bout was exacerbated by the fact that there has been a growth in index-based investing by both institutional investor focused vehicles and a wide range of ETF investors and index-based mutual funds.
"These funds have to own Indian stocks if the index includes India. Generally, this means India large-cap companies with the greatest liquidity. But, since many of these funds also contain China-related stocks and other volatile markets, they have to buy and sell their India holdings to keep within the percentage of India included in the index," explained Freeman.
The slow starter
For sure, some of India’s problems are homemade. Falling Indian stocks mark the end of the so-called Modi wave — the nearly 30 percent surge in shares post-elections in 2014. Investors had hoped the Modi government would quickly invest in creaky infrastructure but this is far from visible. Modi named 20 cities on Thursday which will be provided with uninterrupted power, water and public transport in a $7.5 billion makeover to turn them into smart cities. It's not immediately clear how Modi will be able to provide high-quality infrastructure to these cities within five years.
"It should be no surprise that implementing slogans is harder than promoting them. Modi needed to take some very bold reforms early in his term to take advantage of the post-election halo effect. The inability to move rapidly gave the window to the opposition to begin complaining and dig-in," said Freeman.
The bill to allow the introduction of a nationwide goods and services tax (GST) is facing resistance in Parliament.
"Indicative of the long standing lack of coordination between Indian bureaucracies, not long after Modi, the reformer took office, the Indian Tax Service issued notices for Minimum Alternative Tax (MAT) deficiencies to foreign entities, including funds, going back to as much as three years in arrears. This was a strong signal that implementing policies to encourage foreign investment would continue to be a challenge and a major headache for the huge pool of foreign capital that sits on the sidelines "waiting" for their moment of confidence," said Freeman.
Despite the slow pace of reforms money managers are still overweight Indian stocks, and underweight China, according to Goldman Sachs.
"With India being a 'consensus long' and a strong overweight within regional/EM funds, investors are worried about potential positioning risks if 'flow pressure' persists, particularly in the light of elevated stock valuations and negative sentiment around EM assets," Goldman says.