Strange though it may sound, there appears to be a correlation between fund flows and the World Cup. Going by the past, therefore, Citigroup, believes fund flows could stay weak in the near term; while the net outflow during 2002 was 1% of assets, in 2006 it was 2%. Also hedge funds seem to be growing at a slower pace. JP Morgan reports that although more funds were started than shut down in the first three months of the year, the number at 14, was much smaller than the 65 and 34 funds kicked off in the two preceding quarters respectively.
But the slowing pace of inflows into hedge funds shouldn?t really be of too much concern for emerging markets; inflows into China, which were weak even a couple of months back, are back on an uptrend and the country has seen inflows for the fourth consecutive week since mid-May. Moreover, flows into India, Indonesia and other regional markets like Thailand and Malaysia are turning positive. Interestingly there seems to be some churning of money because Latin American markets have now seen nine consecutive weeks of withdrawal. Over the last six weeks, money has been pulled out of global funds taking redemptions to $7.2 billion while Global Emerging Market funds have attracted just under $2 billion.
That ties in with flows into India where foreign institutional investors had sold stocks worth out $2 billion in the Indian market in May, but have bought again in June, albeit just 170 million. The result is that the Sensex which had lost 10% from its April peak of 17,970 to fall to 16,023, has recovered most of the losses, having clambered up back to 17,338. Meanwhile, there?s more good news in that Fitch has upgraded India?s local currency outlook to stable from negative. And the monsoon has arrived.
That?s not to say there are no clouds on the horizon, but it?s interesting that RBI deputy governor UshaThorat should observe that the Euro crisis may trigger more capital inflows into the country because India is an attractive destination. Clearly the downside from the troubles in the Eurozone are limited and what?s more falling prices of oil and metals will help end users and bring down the forex bill. The RBI, however, may be concerned about the subsequent excess liquidity at a time when inflation remains high; at 10.2%, wholesale inflation is at its highest in 19 months. Although inflation may be close to peaking, there?s concern that the central bank may resort to raising interest rates before the scheduled meeting on July 27, 2010, given that the IIP numbers have surpassed expectations at 17.6% for April 2010. That?s one reason bond yields spiked to a four-week high at 7.6% last week.
Even if the central bank does raise rates, however, the equity markets, which should continue to move in narrow range for some more time, aren?t likely to be upset. At a price to earnings (P/E) multiple of 16 times, the market is slightly more expensive than its long ?term average. Also, global commodities account for 55% of the earnings growth for 2010-11 so with downgrades expected for the metals pack,the market will become a little more expensive. Nevertheless, earnings should grow by over 20% this year after two years of relatively flat growth which in itself is a very good number.