The US Federal Reserve?s Quantitative Easing (QE) II was supposed to have channelled flows into emerging markets, including India, but gathering macroeconomic headwinds and policy paralysis in many of these economies have seen investors taking risk off the table. Data put out by EPFR show that Emerging Market Equity Funds, tracked by it, posted third straight week of outflows in early February ? their worst three-week run in three years. China Equity Funds posted outflows for the seventh time in the past 10 weeks while India Equity Funds saw money moving out for the fourth consecutive week.
Overall, EPFR Global-tracked equity funds received collective inflows of $2.8 billion for the week ending February 9, with flows into the US, Europe, Global and Japan Equity Funds more than offsetting the $3 billion pulled out of Emerging Markets Equity Funds, as questions about the economic, political and policy implications of higher inflation continue to dog this asset class.
EPFR Global, a subsidiary of Informa, provides fund flows and asset allocation data to financial institutions around the world, tracking both traditional and alternative funds domiciled globally with $14 trillion in total assets.
FIIs have pulled out close to $1.5 billion from the Indian stock market since the start of the year after having shopped for a record $29 billion worth of Indian equities in 2010. The bellwether Sensex has lost more than 13.5% since the start of the year with exchange traded funds (ETFs) being among the biggest sellers. Wisdom Tree Earnings Funds, for instance, has knocked off more than 100 stocks from its portfolio of 250 over the last couple of months.
The sharp fall in share prices has endangered balance sheets of those Indian companies that have borrowed in the overseas markets through foreign currency convertible bonds (FCCB), since many of these bonds may now not get converted into equity shares. An analysis by a foreign brokerage shows that approximately $5.5 billion worth of FCCBs, across 80 issues, are scheduled to mature in the next 15 months. Share prices would have to more than treble from the current levels for bonds to get converted and spare the borrowers from repayments.
More money could move out as macroeconomic headwinds gather force and threaten to slow down growth. The biggest concern, across key emerging markets, is inflation. Last week, China raised its key interest rate by another 0.25% while the Indonesian central bank increased rates for the first time in two years. Brazil, South Korea and India are all seen as likely candidates for further hikes during the period ending March 2011. India?s IIP for December rose an anaemic 1.6 % year-on-year, a 20 ?month low, albeit on a high base. The release of growth estimates by the government on February 8, indicate that growth will taper off in the second half of 2010-11 and has prompted economists to lower their GDP growth forecasts for 2011-12. In fact, Standard Chartered Bank now has a growth forecast of just 8.1%.