The Indian equity market has made a comeback after hitting a low of 12,595 on July 16. The BSE Sensex has gained around 11% since, the best amongst the Bric nations and other leading markets. What helped the market was the fall in oil prices. Though the Indian market still features amongst the second worst performers year-to-date, overseas investors are reworking the ratings accorded to it. A shift in outlook is visible in their reports. It is early days yet, since foreign institutional investors (FIIs) remained net sellers in the Indian equity market in August.
With oil prices cooling down, the India interest seems to be rising among foreign investors. ?Oil is India?s biggest concern and hence, with the softening of prices, the market was bound to react,? says an analyst with an overseas brokerage. Moreover, India being a large importer of commodities, the easing of global markets is also seen as a positive for the equity market as opposed to other Bric countries like Russia, Brazil and China, which depend a great deal on exports of commodities.
A CLSA report by Christopher Woods, titled, ?The Grotesque and the Promising?, states, ?Oil and the commodity complex in general have commenced a medium-term correction, which will last for several quarters and not just weeks. This would be a major positive for India from a relative-return perspective in the context of dedicated Asian and global emerging market portfolios.?
CLSA raised India?s weighting in the relative-return portfolio by three percentage points to overweight, with money taken out of China, Korea and Taiwan.
?We are downgrading Indonesia in order to upgrade India?, said a Credit Suisse report released early this month.
The correlation between crude prices and Sensex has been startling, with the benchmark index moving in the inverse direction of crude. However, a point to note here, is that that the movement in the equity markets has been driven by domestic high net worth clients, retail investors and select institutional buyers (insurance) and not the usual suspects?FIIs and mutual funds.
But the overriding potential of India?s economy is still top of the mind for institutions. As Vijay Gaba of Merrill Lynch mentions in his report, ?While the present weather is overcast and cold, the spring may not be far behind. Growth, though slowing, is certainly not collapsing. There is no structural breakdown in the economy. A significant correction in commodity prices has eased the concern. Inflation expectations seem to be peaking off. The industrial credit growth is still robust, despite positive real rates. Global growth is also not yet dead. Valuations are not be compelling, but far from expensive territory.?
In August, FIIs have have been net sellers to the extent of Rs 1,211.70 crore ($300 million), taking the tally for net sales to Rs 28,513 crore ($7 billion) for the year. Similarly, mutual funds have been net sellers in August to the tune of Rs 767 crore. Both FIIs and mutual funds have, however, stepped up their exposure to the debt segment. Funds invested around Rs 7,050 crore in the debt market in August, the second largest amount in FY09. For the overseas investors, with net purchases of Rs 1,257.80 crore, August was the second consecutive month of net purchases in the debt market.
?Portfolio managers and select investors are betting on the return of overseas investors and are building up positions,? says Dhiren Garodia, who works with a Mumbai brokerage.
And overseas investors, some of whom have started reworking their India ratings, seem to be cautious, and are waiting for more positive indicators, before taking a full plunge.
While oil prices remain the primary concern, there are some others that hold back full-scale FII buying at the moment. Chief amongst them is inflation and the concern that the central bank might not be able to rein it unless it sacrifices growth (read earnings). This, in turn, is impacting business confidence and, therefore, jeopardising capacity expansion plans. This can be seen from the fact that several initial public offerings (IPOs) have been put on hold. According a Prabhudas Lilladher report authored by Apurva Shah, ?The pipeline (including issue withdrawn, approval sought, approval expired and approval received status) is now a staggering Rs 43,100 crore . Also, several hundred companies that were planning to file with the Sebi have decided to postpone the same. All inclusive, the pipeline could be worth a massive Rs 50,000-60,000 crore.?