Fears of foreign institutional investors? (FII) capitulation may be receding, says Deutsche Bank in a recent report, citing net purchases of close to $1 billion worth of equities by FIIs since RBI governor Raghuram Rajan?s recent announcements.
The international brokerage believes that the recently observed strong buying activity has eased concerns of FII capitulation that emerged following outflows of $4 billion between June and August 2013. In the month so far, FIIs have purchased $1.1 billion worth of Indian stocks.
?Recent announcements over the FCNR-B, supportive trade data and easing investment facilitation in debt markets have resulted in imparting long-needed and much sought-after credibility over both the financing of CAD and the actual CAD,? the report added.
While Detusche believes that it may be premature to conclude that the worst of the FII selling is over, the brokerage highlights two instances when the sharp currency depreciation was followed by periods of aggressive FII buying. ? ..Rupee depreciation of 13% between September and December 2011 was followed by a period of FII inflows cumulating $8 billion over the next three months. Similarly, INR depreciation of 11% over March-June 2012 was followed by FII inflows of $6 billion over next three months,? says the note.
It further reiterates the importance of currency stability as the key determinant for equity market inflows.
While any potential weakening in US bond yields and reduced fears of an aggressive taper by the US Federal Reserve are also acknowledged as factors aiding the FII flows, a more sustainable return of faith will hinge on the government’s commitment to its fiscal deficit target of 4.8% of the GDP, said the report. Deutshce further adds that investors are expecting a fuel price hike as an endorsement the government’s commitment to fiscal discipline.
However, in the absence of a more stable domestic macro, it advised investors to concentrate on beneficiaries of rupee depreciation, rural plays and global recovery plays.
Meanwhile, India has fallen further out of favour among fund managers, says a monthly survey by Bank of America Merrill Lynch. With a net underweight of 27% in September against about 13% in August 2013, India is the most under-owned market by Asian fund managers. Emerging market fund managers have maintained their underweight on India in September at about 28% even as allocations to China and Indonesia improved. In case of Russia, allocations more than doubled. As a result, a record 92% of investors are overweight on Russia in September 2013.
The surveys concluded that even though fears of a China hard-landing have largely been allayed, investors remain bearish on emerging market equities. “A net 18% of global investors are Underweight Emerging Markets, among the lowest exposures since November 2001,” it added.
