FIIs cut exposure to India, shift to safer markets

FIIs cut exposure to India, shift to safer markets

MUMBAI: The Indian stock market has witnessed net foreign fund outflows of Rs 3,550 crore since the start of 2010, making it one of most badly hit markets among emerging markets. A desire to shift a part of their money to safer dollar-denominated assets in the wake of the recent credit turmoil in Europe, concerns over further weakening of the rupee and stretched equity valuations have led foreign portfolio investors to cut their exposure to domestic equities. With a net withdrawal of $754 million in 29 trading sessions (since January), India trails just behind Taiwan ($2,488 million) in terms of foreign outflows, according to Bloomberg. Indonesia and Thailand, with net outflows of $238 million $294 million respectively, are among the other Asian market that have seen foreign capital outflows since the beginning of this year. Around $3 billion has been redeemed from the entire emerging market cluster during the first week of February, say market experts. While much preferred Asian equity hubs witnessed a sell-off, dormant markets like Japan, Philippines, Vietnam and Pakistan witnessed investments flowing in from foreign portfolio investors. South Korea logged inflows to the tune of $290 million since January while the surprise package was Japan, which witnessed inflows worth a whopping $18,868 million. Even if one takes a shorter time-frame from February, Japanese funds were winners as they witnessed seven consecutive weeks of net inflows. Key benchmarks in Japan, Vietnam and Philippines currently trade at 6-12 times price-to-earnings (P/E). In India’s case, despite a near-10% correction, the local market still commands a premium valuation of 20 times trailing P/E, making it a fairly-valued zone for any class of investor. “Japan currently offers investors a chance to gain on currency arbitrage. Moreover, asset prices (especially equities) in Japan are cheap. Astute cross-border investors will try to make most of this situation by moving their investments into Japanese shares,” said Gopal Agarwal, equities head, Mirae Asset Global Investment. In India’s case, according to market experts, the sell-off has been more because of global factors and stretched stock valuations. The sell-off in key emerging markets like India started after US President Barack Obama decided to limit financial risk-taking by banks. The sell-off aggravated after the credit crisis in Greece and Portugal. The hardening of the dollar also resulted in foreign investors shifting their rupee-based investments to dollar denominated assets. A rise in (dollar) value (against the rupee) increases the borrowing cost for foreign investors who had borrowed dollars to invest in Indian market. They exit their rupee investment at higher levels, pocketing currency value differential along with portfolio gains, if any. “Investors will start coming back once the rupee moves up to 48 - 49 levels,” said Mr Agarwal. Echoing his views, Ambareesh Baliga, vice-president, Karvy Stock Broking said: “FIIs are likely to stay away from Indian shares until there is clarity in world markets. It may be 2-3 months before they start reinvesting in Indian shares,” he said. According to Mr Baliga, while the market may not see a deep fall from current levels; it probably will be locked in a narrow range at lower levels. Investors should be cautious while investing in these markets, he added.

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Record industrial growth strengthens case for stimulus exit

Record industrial growth strengthens case for stimulus exit


With the Index of Industrial Production (IIP) rising 16.8 per cent on the back of record manufacturing growth, the pressure has increased on the government and the Reserve Bank of India (RBI) to consider an early exit from the stimulus measures of the past 15 months.

Manufacturing, with an almost 80 per cent weight in the index, grew 18.46 per cent compared to a 0.6 per cent decline in the same month in 2008.

The electricity sector, however, grew far more slowly at 5.4 per cent (up from 1.59 per cent a year ago), prompting analysts to suggest that the industrial recovery was not broad-based enough to merit an immediate withdrawal of stimulus measures.

The mining sector’s 9.5 per cent growth was below double-digit levels, recorded three times in the previous six months, but much higher than the 2.17 per cent growth achieved in December 2008.

Manufacturing growth was propelled by the robust performance of capital goods (38 per cent), consumer durables (46 per cent) and intermediate goods (21.7 per cent). In sharp contrast, consumer non-durables grew only 3.7 per cent, once again pointing to the narrow base of the industrial recovery.

	Mining	Mfg	Elcty	General
2008-09	2.6	2.8	2.8	2.8
2009-10	8.5	9	5.8	8.6
(Apr-Dec)

The low base effect — industrial output in December 2008 fell a quarter per cent — also contributed to the record December numbers. On a month-ago basis (with no seasonal adjustments), however, the December 2009 performance showed an industrial growth rate of 10.81 per cent, the highest since the industrial slowdown began in the third quarter of 2008.

On a month-ago basis (with no seasonal adjustments), however, the December 2009 performance showed an industrial growth rate of 10.81 per cent, the highest since the industrial slowdown began in the third quarter of 2008.

Finance Minister Pranab Mukherjee expressed satisfaction at the numbers and said the third-quarter GDP growth numbers would be strengthened by the IIP figures. “It is quite encouraging and I do hope that the third-quarter GDP figures will also be encouraging…It will get reflected in the overall GDP,” Mukherjee told reporters.

Mukherjee’s statement comes after several positive economic indicators were released during the week, all of which augured well for private investment prospects. These indicators included the sharp rise in the business confidence index to a two-year high, a 14 per cent growth in exports and a healthy flow of foreign investments estimated at over $20 billion in the first nine months of the current financial year (compared to $21 billion last year).

Exuding similar optimism, D K Joshi, Crisil India’s principal economist, said: “It is definitely better than any forecast. The high growth in manufacturing and consumer durables have been sustained and that is a big positive surprise”.

Joshi added a caveat, however, observing that “The data is getting more and more broad-based but it still continues to be quite narrow”. He also pointed out that the base effect had a role to play in the December numbers and sustaining the high level would be difficult even though the month-on-month growth would continue.

Jyotinder Kaur, economist with HDFC Bank, differed. “The numbers are encouraging because they clearly point to a sequential spurt and it is across the board. Considering the strong performance in the past few months the numbers have reached a level where they are not purely driven by stimulus measures. So the growth, even though not this high, can be sustained with a gradual pull back of the stimulus,” said Kaur.

Some analysts also suggested that the number might lead to a rise in policy rates by the RBI before the fourth quarter policy rates.

“With industrial production growing at a record pace, capital goods production surging, business confidence high and foreign direct investment rapidly returning, there are now a number of signs that private investment is set for strong growth. This should facilitate the RBI putting a greater focus on inflation. The current situation no longer necessitates a repo rate of 4.75 per cent and a cash reserve ratio of 5.75 per cent, which are low by historical standards and more appropriate for a slow recovery scenario,” said Nikhilesh Bhattacharyya, economist with Moody’s economy.com.

The cumulative growth rate for April-December of the current financial year stands at 8.6 per cent against a low 3.6 per cent during the corresponding period in the previous fiscal. Industrial growth, on a cumulative basis, for the third quarter of the current fiscal stands at 13 per cent,compared to one per cent in the comparable period last year.

Consumer durables led the growth in manufacturing by expanding at a significant rate of 46 per cent in December 2009. The sector had contracted 4.2 per cent in the corresponding period in 2008. Consumer non-durables also showed a marginal acceleration in growth rate at 3.7 per cent compared to 3.2 per cent last year.

Intermediate goods, which were the worst hit due to the downturn and had contracted 8.9 per cent in December 2008, also posted a robust growth of 21.7 per cent in December 2009.

Src: Business-Standard