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Tuesday, October 26, 2010

FII Fund Flow How Long Will they Last

Monthly foreign fund inflows in the stock market is set to touch a new record this month. And if everything goes well, the cumulative FII inflow figure since 1992 — that is from the time India allowed foreign fund managers to invest in the country`s market could surpass the $100-billion mark (INR 450,000 Cr), according to SEBI data. FII data published by the regulator showed that as on Friday, net inflow for October stood at INR 26000 Cr. This is within striking distance of INR 27000Cr worth of net inflows that was recorded in July 2007. The BSE data since May 2005 shows cumulative receipts at a negative balance of INR 25,000 Cr this is including the huge sell of of 2008. FII net investments for the last 12 months amounts to  INR 75000Cr. Data can be anything you can take different point of analysis and make your statements. As usual my advice to the Inquisitive Investor don't take any news paper headline at face value.  

As far as the debate about whether fresh flows from FII's can be expected is concerned, I would expect another 40,000 Cr by the end of next year to come from FII's. By March 2011 I expect FII contribution to touch INR 100,000 Cr for the fiscal 2010-11.  


The ratio FII's follow for investments
Market Cap to GDP is typically used as a barometer by analyst to invest into any countries stocks. Foreign investors typically look at MC:GDP ratio of that country to understand whether the country is overvalued or undervalued. Though I personally don't think it is a foolproof method. When we look at India in 2007 our MC exceeded our GDP by around 120% and right now with a GDP of almost 50,00,000 Cr our market cap barely touches that figure, so I still feel there is a considerable rally left from a FII point of view. Another point is with India growing at 8%, the GDP of 50,00,000 Cr is bound to go up 8% which will become 54,00,000 Cr and accordingly the MC has to increase so since markets are always forward looking we still have some rally left.

Liquidity in the hands of Foreign Investors. 
The flow of individual investor dollars into fast-growing countries like India, China & Brazil has sped up in 2010, as emerging-market stocks have outperformed those in the U.S. and other developed nations. Since its 2010 low on May 25, the MSCI Emerging Markets index is up 29.3 percent. In that same period, the MSCI World index, which includes only developed markets, has risen 16.8 percent and the U.S.-only Standard & Poor's 500 index is up 9.9 percent.

A report from JPMorgan states that retail investors have put $60 billion (INR 270,000 Cr) in emerging-market equity funds so far this year while pulling $74 billion(INR 330,000 Cr) from developed-market stock funds.

According to TrimTabs Investment Research, $20.9 billion (90,000 Cr) has flowed into diversified emerging-market exchange-traded funds so far this year, compared with $14.4 billion (63,000 Cr) in all of 2009.

A Bank of America Merrill Lynch survey of fund managers, released Oct. 20, found that 49 percent have a higher-than-usual, or "overweight," exposure to emerging markets, up 17 points from last month. A Russell Investments survey of 350 financial advisers in September found 59 percent plan to boost their emerging-market exposure in the next year, up 11 points from a June survey.

CONTRARIAN VIEW
Yet on Oct. 18, brokerage Morgan Stanley contradicted much of the rest of Wall Street with a recommendation to "scale back" emerging-market stocks. Morgan Stanley's chief Asia and emerging-market strategist, Jonathan Garner, told investors to reduce their holdings "gradually, rather than precipitately" from an overweight exposure of 6 percent more than usual to 4 percent. Thats it just 4% allocation to emerging markets and look at the amount that turns up. 

By contrast, from the third to fourth quarter of 2010, Barclays Wealth raised its recommended emerging-market stock portion from 8 percent to 9.5 percent. In its fourth quarter Global Asset Allocation report issued Oct. 1, Bank of America Merrill Lynch gives developing-market stocks a favorable "overweight" rating, at a recommended 11 percent portfolio weighting.

THE CURRENCY ANGLE
this is what some FII are saying as reasons to invest into India

"We don't actually think emerging markets look cheap," says Barclays Wealth investment strategist Brian Nick. There are other reasons, however, to invest outside the developed world—especially to gain exposure to currencies that have a good chance of rising, he says. "It's important, we think, to have that emerging-market currency exposure, especially because the U.S. seems to be doing everything it can to weaken the dollar."

India's currency, the rupee, has risen 5 percent so far this year against the U.S. dollar, while the Brazilian real has increased 2.25 percent and the Chinese renminbi has gained 2.5 percent.

US Exposure
Data indicate that most U.S. investors still send a relatively small portion of their portfolios to emerging markets (300,000 Cr). According to the International Monetary Fund, emerging-market stocks have grown as a portion of total U.S. holdings from 1.63 percent in 2004 to 2.41 percent in 2009. That increase, however, lagged the growth during that time in emerging-market stocks' proportion of total world market capitalization, from 8.7 percent to 15.9 percent.

When developed markets have just made about on an average just 5% of their portfolio into emerging markets you can imagine the kind of money when they increase their portfolio allocation to 10% or even more. 

You have to understand Asset Management firms in the US mange funds in excess of 20,00,000Cr so when small allocations trickle from these mammoth funds into Indian stocks there is bound to be a rally. My advice is don't be surprised if the net FII allocation to Indian Stocks crosses 100,000Cr.  


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