Secret of the Sensex: Biggest FII turn-on since 2000

On Wednesday, the Sensex crossed the 18,000 mark and closed at a six-month high. India, which was among the worst performing markets by December 2011, is one of the best performing ones today.

Fundamentally, nothing seems to have changed, either in India or in the world. In fact, after the December quarter corporate numbers, the outlook is even more bleak.

So what is the secret behind this sudden rally?

Answer: The largest foreign inflows since the turn of the decade.

The main reason for the sharp 18 percent rise in indices is the Rs 22,000 crore FII money that has entered the country, the highest ever, since Sebi started disclosing the data in 2000. Inflows in the first 15 days of February, at Rs 11,681.7 crore, were higher than that for the entire month of January 2012, which stood at Rs 10,907 crore. This means around $4 billion of money has already flown into the country in the first 45 days of this year. It has resulted in Sensex moving from a low of 15,358 0n 2 January 2012 to 18,231 on 15 February.

It is not only India which has witnessed an upsurge in investment. Emerging market equities have seen an inflow of $17 billion in 2012. Week-ended 8 February 2012 saw the highest inflows in 68 weeks at $6 billion. Emerging market funds had seen a record outflow of $48 billion in 2011.

A good set of economic numbers from the US and hopes that Greece will toe the line as per the diktat of the European Central Bank have resulted in renewed confidence in the emerging markets.

The MSCI (Morgan Stanley Capital International) Emerging Markets Index has already gained 15 percent in 2012, the best start to a year since 1991. It has outperformed the MSCI World Index by 6 percentage point.

According to a report in Bloomberg, Jonathan Garner, the chief Asia and emerging markets strategist at Morgan Stanley, said the surge in optimism is a contrarian indicator that may signal the rally has gone too far, too fast. Michael Hartnett, chief global equity strategist at Bank of America Investor, says holdings in emerging markets have climbed to a level that historically foreshadowed short-term underperformance.

The sharp rise in the MSCI emerging market index has narrowed the valuation gap with developed markets to 15 percent as compared to 20 percent in September 2011. While emerging markets trade at a valuation of 12 times their reported profits, the developed markets are trading at 14 times their reported profits.