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India focussed offshore funds which have not witnessed net outflows since November 2016, are witnessing net outflows over the last three months, says Himanshu Srivastava, senior analyst, Morningstar Advisers India. Talking to ET Now, Srivastava says FIIs are putting bets on IT, utility and consumer defensives.

Edited excerpts:
It looks like FIIs have been on a selling spree. Why are they exiting Indian markets after investing substantially in 2017 and in January 2018 as well?

It is not particularly about India, they are a bit cautious about emerging markets as well. Earlier, the rising crude prices and higher bond yields in the US were the only concerns. Now even dollar has started appreciating substantially. This does not augur too well for emerging markets. South Korea, Taiwan or maybe Thailand along with India, have been witnessing net outflows from FIIs. India has witnessed net outflows of around $1.45 billion in the last two months starting April to May so far.

India has been more affected because there are some domestic factors that are also playing at the same time. One, although the corporate earnings have improved, but FIIs are still opting for a wait and watch approach to ensure that these are concrete signs of revival and not just one-off cases. The other thing is that we are fast entering into a phase full of uncertainty given that major state elections are coming up which would lead to the all-important general elections.

The other thing is that crude prices are rising, rupee is depreciating and a current account deficit and even fiscal deficit may possibly move up which may stoke inflation further. It may give rise to a higher interest rate regime and that may not go well for the economic growth and that is something that FIIs are actually watching very closely.

Looking at all these aspects along with the US dollar, the way it is appreciating, it may appreciate further if the US economy continues to do well and the US Fed continues to hike rates further. Now these factors are not really conducive for markets or emerging markets like India. The investors are now moving out largely because they do not see too much of a growth prospects going ahead given the volatility and that is why they are booking profits now.

Are similar trends being seen for India focussed offshore funds and ETFs and even for regionally diversified offshore funds, is there a similarity in the trend that you are spotting?

They are similar trends but one interesting thing is that India-focussed offshore funds, which are considered to be of long-term nature, and which had not witnessed net outflows since November 2016, over the last three months, has started witnessing outflows. This shows that the long-term investors are now booking profits and moving out of India because they do not want to be a part of an anticipated or speculated volatility in the second half of the year, as we get closer to the general election.

This is a dramatic change in trend that we are witnessing. ETFs have largely seen net outflows but that is because they are short term in nature. Any movement or any news flows impacts the flows there. Coming to regionally diversified funds, there are three broader categories – global, emerging markets and Asia or Asia-Pacific largely depending on the regions where they invest in.

Now these segments have witnessed net inflows in the first three months of the year. We should not give too much importance to these net inflows because Indian markets fell during the first quarter of the year. Now they are maintaining a status quo on India. They do not want the India allocation to come down or shift dramatically and that is where they have bought to ensure that the India portfolio is stable. Broadly, there is a cautious stance and they are staying on the sidelines.

Any sector where FIIs have started to focus in? How do you see the scenario unfold in the coming months with regard to FII flows?

One of the sectors where they have started building position is technology. It is largely stock specific. Given the fact that rupee has depreciated now, IT is an export-oriented sector and has become lucrative. FIIs are actually having a lot of traction in that particular space.

The other sector that they are really increasing exposure is utility sector largely because there the valuations are pretty attractive. Some of the sectors that they are staying away from are healthcare and communication services because they do not see too much of a growth prospect at the moment.

Consumer defensive is another sector where they have started building exposure. Being defensive, it is a kind of stable sector during market volatility. Going ahead, it is very difficult to predict what will happen four or five months down the line but for the next couple of months, this scenario will continue. There will be some more outflows given the cautiousness in FIIs approach towards emerging markets as well as India.

There could be some more outflows in the next couple of months and that is one thing we can say confidently now. But we are not sure what is going to happen after three to four months. That is very difficult to predict at this point of time.

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