Indian equities have been exceedingly volatile recently. In the past four months, the bulls have been jittery and the bears have clearly had the upper hand. The benchmark BSE Sensex, the barometer for the Indian stock market, has tumbled eight per cent in the July to November period. The positive cues have all been ignored - India overtaking China to emerge as the fastest growing major economy, inflation being reined in and the central bank changing its monetary policy stance and paring rates to support growth. Indeed, foreign institutional investors (FIIs), the lifeline of the Indian equity market, have turned net sellers and pulled out $3.5 billion in the past four months.
So, why has the market lost steam? Experts point out that Dalal Street is concerned about the likelihood of the US Federal Reserve finally raising rates. This could lead to an outflow of FII funds from the emerging markets into the US. Corporate earnings in India have also disappointed investors, both domestic and global. Indeed, the July to September period was the fourth quarter in a row that Sensex companies have recorded negative sales growth. Then, the inability of the Modi government to push through crucial reforms in Parliament has also added to the gloom.
But, it's important not to have a myopic view of India and the Indian markets. India is not an isolated market and isn't decoupled from other countries. Yes, India has corrected but it is not alone. The global commodity crash has taken its toll on emerging markets. In fact, barring Hungary (up 30 per cent) and Russia (up 17 per cent), all country indices in the MSCI Emerging Market Index have been down between 3 to 60 per cent in 2015. The reason is the near synchronous massive outflow of funds by global investors from emerging markets. The MSCI index is designed to measure equity market performance in global emerging markets and is tracked by most FIIs.Stock market analysts say that in the last five months global emerging funds have sold off $60 billion worth of equities, which exceeds the prior record annual outflow of $39 billion in 2008. "This year emerging markets witnessed a massive outflow of nearly $80 billion," says Avinash Gupta, Managing Director, Head of India Equity Sales at Merrill Lynch.
But, to put things in perspective, despite the massive FII outflows from emerging markets, India is still going strong. In fact, India appears to have weathered the current commodity crisis well. It shows how resilient the domestic equity market has become since the global financial crisis (GFC) in 2008. This is evident from a closer look at the facts. In 2015, so far, the Indian equity market is down 6 per cent. FII flows in the period have been positive with a net inflow of close to $4 billion in Indian equities. This, at a time, when most global emerging funds have seen net outflows from investors to the tune of $80 billion. This is in contrast to 2008 when, in the wake of the GFC, FIIs pulled out $12 billion from the Indian equity market and the BSE Sensex slumped over 50 per cent. Then, the emerging funds had seen a sell-off of $39 billion. (See India on Strong Footing.)
This clearly indicates that FIIs are still positive on India and Indian equities compared to other emerging nations. This is largely because peers such as Brazil, China and Russia are faced with slowing economic growth and are also bogged down with pressing domestic issues.
The other positive for India has been the greater participation of domestic funds. The mutual funds in 2015 have played a pivotal role in the Indian equities market. In 2015, so far, domestic mutual funds have invested close to $8.8 billion in equities, compared to $2.9 billion during the GFC in 2008. This has largely to do with the greater flows into domestic funds this year. Investors have pulled money out of underperforming assets such as real estate and gold and turned to equities. This has helped in restricting the fall in the Sensex. "Indian market may be expensive, but it's well-placed to take advantage of the imbalance in the world given its demographic profile and its appealing domestic economy," says Mark Matthews, Head of Research at Julius Baer, a Swiss bank that operates wealth management services in India. Geoffrey Dennis, Managing Director, Head of Global Emerging Markets Strategy at UBS Investment Bank, adds: "India is very well owned. Despite the recent sell-off, FIIs exposure to India is 50 per cent more than the country weightages in MSCI Emerging Market Index."
So, despite the current turmoil in the market, FIIs still appear to be long on India and are hoping that the country will continue to deliver high economic growth.