By Chris Flood
More than $1bn has been withdrawn from India-focused exchanged traded funds listed in the US and Europe since the beginning of the year.
The outflows, which reached $1.006bn by the end of October, have happened amid rising concerns among foreign investors about stubbornly high inflation, repeated corporate scandals and slow progress with reforms.
The India ETF flows have also contributed to a dramatic slowdown in overall inflows into Indian equity markets by foreign investors since the beginning of the year.
This year marks a stark contrast to both 2010 and 2009 when India ETFs attracted positive inflows of almost $1.7bn and $1.4bn respectively, according to data from BlackRock.
Assets in India ETFs stood at just under $7bn at the start of 2011. But India?s stock market has fallen sharply this year with the FTSE India index down 33.2 per cent in dollar terms. The fall in the market combined with ETF outflows has reduced assets in India-focused ETFs listed in the US and Europe to $4.4bn.
Among the individual funds which have suffered this year are the WisdomTree India earnings ETF, known as EPI, which has seen outflows of $369m and Lyxor?s MSCI India ETF which has registered outflows of $241m.
One possible deterrent for ETF investors is that India?s stock market valuation still looks relatively expensive in spite of the decline in equity prices this year.
The market trades on a 2011 price earnings multiple of 14.6x, falling to 12.7x in 2012, according to Citigroup?s estimates, higher than the broad MSCI emerging markets benchmark which is trading on 10.1x earnings for 2011 and 9.2x for 2012.
India?s stock market is also trading on a higher price earning multiple for 2011 than China (9.2x), Brazil (9.1x) or Russia (5x).
Earnings growth for India?s stock market, however, is expected to accelerate, up from 14.9 per cent this year to 15.5 per cent in 2012. Earnings growth for the other Brics nations is expected to slow next year and for emerging markets as a whole to drop from 13.2 per cent this year to 10.5 per cent in 2012.
Taimur Baig, an analyst for Deutsche Bank, says India?s economy is at a crossroads and its policymakers need to act quickly to improve infrastructure, regulation, governance, and macroeconomic stability.
Mr Baig warns that social and economic progress will be impossible unless the government can encourage large scale investment, especially in the manufacturing sector, to absorb the tens of millions of new workers entering the labour market each year.
He notes that there is no shortage of large consumer companies willing to invest in India and that foreign direct investment reached $22.5bn during January-September 2011.
?Investors remain attracted to the India story, but they need a more enabling environment. This places the burden of progress on the government,? says Mr Baig.
? The Financial Times Limited 2011