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Foreign fund flood washes out
Indian investors
By Indrajit
Basu
KOLKATA - The US$17 billion that
foreign institutional investors have pumped into
the Indian stock markets over the past two years
is beginning to show. The Bombay Stock Exchange's
benchmark index, Sensex, breached the magic 7,000
mark earlier this week. At first, it seemed that
the pact between the two feuding Ambani brothers
of conglomerate Reliance had energized the market.
But as the investment numbers of the FIIs (foreign
institutional investors) started trickling in, it
became clear that the main trigger behind the bull
run lay elsewhere.
Even as the Indian
government refuses to admit that the country's
capital markets are linked to the mood swings of
FIIs, it's increasingly becoming clear just who
calls the shots around here. In fact, the more the
FIIs intensify the bull charge, the more the
domestic investors seem to stand aside. For
example, FIIs reported a net inflow of $107
million on Monday - the day the Sensex touched
7000 - the highest amount pumped into the bourse
on a single day in two months. The same day, local
mutual funds reported a net divestment of $52
million.
In June, as of Wednesday, FIIs
had poured in $875 million to Indian markets. Over
the same period, local mutual funds have pulled
out over $150 million. Market number crunchers add
that throughout the past two years, ever since the
Indian market entered an unprecedented bull phase,
compared to the FII enthusiasm, local mutual funds
and financial institutions have remained on the
sidelines, primarily using the bull run to book
profits rather than increasing their stakes in the
market. In the 2004 calendar year, while the FIIs
brought in over $11 billion of net investments,
local institutions were net sellers to the extent
of $210 million. This year, until Monday, the net
exposure of local funds stands reduced by about
$300 million.
Indeed, foreign investors,
whose dominance over the Indian stock markets
started over six years back, have now become
invaders. A recent survey by Economic Times - the
largest financial daily in Asia - of 100 large
privately owned companies found that during the
last five years - between March 31, 2001, and March
31, 2005 - while the FIIs' stake has increased in
as many as 83 companies, that of the Indian public
has increased in only 21. "While the FIIs are
placing their faith in our bourses, our own
investors are appearing indifferent and selling
their holdings to book immediate profit," said the
study. "They have earned profits, but, in the
process, have witnessed a sharp fall in their
stake in these companies. Their loss was the gain
of the FIIs, who were quick enough to grab these
shares."
More significantly, the study
added that foreign promoters, FIIs, overseas
corporate bodies and GDR/ADR (Global Depository
Receipt/American Depository Receipt) holders now
own a controlling stake in one-third of India's
blue chip companies and have increased their
exposure significantly in nearly half of the 1,600
companies traded actively in the Bombay Stock
Exchange. The companies in which the cumulative
foreign holding is more than the stake held by
promoters and founders include index movers like
Bharti Tele, Grasim Industries, Gujarat Ambuja,
HDFC Bank, Hero Honda Motors, Hindalco, HDFC,
Infosys and Satyam.
There are some,
though, who feel otherwise. The National Council
of Applied Economic Research (NCAER), a
Delhi-based non-profit research outfit that claims
to be independent but admits that it assists the
government (among others) to make informed policy
choices, claims in a just-released study that
"Indian markets have displayed a negative
correlation to FII attitude" and that "the markets
are not likely to be surprised by a negative FII
attitude". According to NCAER, during
January-March 2005, the FIIs invested $3.8 billion
and the market lost 1.7% while in April-May, as
FIIs pulled out roughly $62 billion, the markets
gained 3%.
The brokerage community and
experts dispute these figures and are unanimous in
their view that the FIIs are ruling the markets.
They even project that markets are slated to scale
higher levels. "The long-term FII view remains
robust," says Boston-based investment advisory
firm Venture Cap, which claims to meets scores of
FIIs every day seeking advice for investing in
India.
Nevertheless, the question is, why
are the FIIs more bullish than local investors?
For one, the FIIs view India is a "success story".
According to them, the economy is growing faster
than the most traditional and developing
economies, with corporate sector earnings growth
one of the best in Asia. But more importantly,
even as Indian indices are hitting all-time highs,
the price-earning ratio (P/E) - the guiding ratio
of stock investors - of the widely tracked index
is lower than in any other bull run previously
recorded.
The valuation of the market is
still reasonable, with corporate earnings expected
to grow at least 15% over the next 3-5 years, says
Nimesh Kampani, chairman of JM Morgan Stanley, one
of the biggest investment banks in the country.
According to Deena Mehta, former president of the
BSE, "The current rise is based on the merits of
corporate performances. The price-earnings ratios
are in the range of 11. These valuations are
attractive for long-term deep-pocket investors."
Still, all admit that while the domestic
drivers of Indian equities are still intact, India
faces external risks like rising oil prices, the
US deficit, and a feared crash landing by China.
The other worry is that "a lot of retail investors
who did not make money when the market went up
from 3000 points in April 2003 are now buying
stocks without paying attention to the risks,"
says Parag Parikh, one of the biggest local stock
brokers. If retail investors panic at any point,
the bullish sentiment could evaporate overnight.
Meanwhile, though, as FII inflows continue
unabated, India seems to be attracting a new breed
of FIIs. Japanese FIIs, which were almost
non-existent in the Indian stock markets, have
suddenly surfaced, and with a bang. According to
market sources, Japanese FIIs have already
invested over $1.5 billion in the past few months
and could invest another $3 billion by the end of
this year. Japanese FIIs, including big names like
Nomura Asset Management and Nikko Cordial, are
even said to be diverting funds from China, Taiwan
and South Korea to invest in India. "They are
looking for better returns in India considering
the rock bottom interest rates in their country,"
according to Cameron Brandt of
EmergingPortfolio.com Fund Research, Boston.
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 2005 Asia Times Online Ltd. All
rights reserved. Please contact us for information
on sales, syndication and republishing.) |
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