Foreign bulls set Indian stocks on
FIIre By Indrajit Basu
KOLKATA
- Snorting bulls led by foreign institutional investors
(FIIs) seem to have gripped the Indian stock markets
firmly as they sent the Bombay Stock Exchange Sensex -
the benchmark index- to a new all-time high on Thursday.
At 6,328.43 points, the Sensex gained 936 points (a 17%
leap) since the market took its worst ever fall just
over six months back. Thursday was also the day for the
country's electronic stock exchange, the National Stock
Exchange, whose index - the Nifty- broke the
"psychological barrier" of 2,000 points and touched its
all-time high of 2,014.65.
A sharp fall in
international oil prices, record-breaking rise in other
stock markets - like Indonesia, Australia, New Zealand,
Mexico and Brazil - all of which soared to highs on
Tuesday aided by the falling dollar as well as the sharp
gains in US markets (on the back of a sharp fall in
crude prices) helped the surge.
"We're sitting
on a cusp of history," said Sanjay Sachdev, country
manager (India), Principal Global Investors, which is
the largest pension fund in North America and a recent
FII entrant in the country. Just six months ago, FIIs
were jittered by what they called the "M" factors. The
month of May saw an unexpected change of government
headed by Prime Minster Manmohan Singh with outside
support of market-unfriendly left parties; and then
monsoons, which play a crucial role in India's economy -
65% of its GDP depends on the farm sector - also seemed
uncertain.
Fearing trouble ahead, foreign
institutional investors decided to take their money
elsewhere. Then came the "I" indicators that caused even
greater concern: inflation reached an all-time high and
domestic interest rates began their first journey upward
for the first time in four years. As the Sensex tanked
from a high of over 6,000 in January this year to around
4,200 in May, it was a case of lost hope for the FIIs.
But suddenly over the past two months, there is
an entirely new force - the "F" factor - which has
started doing wonders to the Sensex. India is getting
flooded with foreign funds. Over the past 14 days, FIIs
have pumped in $1 billion, and with Thursday's inflow of
nearly $200 million, the annual overseas capital inflow
has already hit a record of $7.31 billion. Already India
has accounted for more than 20% of FII inflows in top
emerging markets this year and is seen as one of the two
must-invest, high-growth markets.
"Right now,
India seems to be the right place to invest compared to
other emerging markets," said Michael Kurtz, Asia equity
strategist for Bear Stearns. "Within the context of
earnings growth, India is very attractive because we are
getting some of the best corporate performance out of
India in all of Asia. So the growth-adjusted valuation
now favors India significantly."
In FIIs' eyes,
the India story is suddenly real. "For us, the country
profile in terms of growth as well as political and
economic stability is a primary consideration in making
investments," said Priya Sara Mathur, vice chairperson
of the investment committee of the California Public
Employees' Retirement System (Calpers), which has
invested more than $100 million in India since April
this year and is among the most conservative
institutional investors. "We are very impressed with
India," said Sara Mathur. "It has democracy, a legal
system, modern markets and a wide swathe of high-return
tech as well as brick-and-mortar companies."
Indeed, over the past few months there's been a
sudden and tectonic shift in the manner in which the
FIIs have started looking at India. Ever since India
opened its gates to foreign investors, only the
risk-taking hedge and growth funds have been the big
investors in Indian stocks. But now the long-term - as
well as risk-averse, serious and conservative - players
like pension funds and insurance firms are eyeing India.
And if Calpers thinks India is safe and profitable, can
other FIIs be far behind? In another record of sorts,
over 121 FIIs (taking the total number of registered
FIIs to 625) have registered with the Securities and
Exchange Board of India this year so far, the highest in
the past three years. "In the next three to five years
India will witness tremendous growth. It'd be naive for
any FII to ignore this country," says Sanjay Sachdev.
But to a large extent, India has also been
fortunate. "A mix of fortuitous overlap between the
external environment - like the falling dollar - and the
Indian domestic environment - like a globally ambitious
corporate sector - could also be keeping the trend
positive," says Kurtz. "I think there are two key
factors here that are tipping the scale in favor of
India. The first is we have come into what is conceived
as a weak dollar period and we have observed in the past
that Indian equities do well when the dollar is
falling."
Kurtz adds, "FIIs would rather put
their money in assets that are evaluated in currencies
other than the dollar as a weaker dollar tends to
inflate global commodity prices, so economies in which
commodities have particular impact on domestic income
tend to do better. The evidence is already apparent in
performance in terms of corporate revenue growth."
Nevertheless, it is not all upside. According to
London-based Ian Wilson of Emerging Portfolio.com, "One
is concerned about the number of new papers expected to
hit the primary markets, which could dampen demand for
stocks going forward." Others, however, say a greater
concern is the interest rate trend, which is inching its
way up both globally and within. Higher interest rates
in India may pull down domestic demand and slow down
growth. Similarly, a global recession will force FIIs to
put on hold their plans to commit additional amounts in
emerging markets.
In India's context, what can
spell doom is if higher interest rates in the United
Sates along with the Reserve Bank of India's
(RBI's)effort of tightening liquidity makes it more
attractive for FIIs to invest in the US. "If RBI
continues to subtract liquidity out of the system in the
months ahead, that will act as a headwind against stock
upside," says Kurtz.
Nevertheless, as of now, the party seems to be
in full swing. "India has entered a structural bull
phase that will continue to lead the markets higher,"
said Hemendra Kothari, chairman of DSP Merrill Lynch.
Kothari and his ilk expect that an additional foreign
portfolio investment of $3 to $4 billion in the next two
months.
Annual net FII inflows ($
million)
Year
FII
inflows
2001
2843
2002
762
2003
7590
2004
7310*
*Until
December 2
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12 years
of experience in business/finance and technology
journalism. Besides writing for Asia Times Online, he
also writes for US-based publications, as well as IT
companies.
(Copyright 2004 Asia Times
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