Size doesn?t matter: FIIs place bigger bets on smaller markets

At a time when Indian equity markets are seeing a slowdown in foreign inflows, smaller economies such as Vietnam and Pakistan are showing strong rise in the flows from overseas investors. While market experts attribute the trend to the low-base of fund flows into these markets, they do agree that increasingly foreign institutional investors (FIIs) are ready to try their luck in smaller markets.

According to data available on Bloomberg, Pakistan has seen the sharpest y-o-y growth in FII inflows at 14,257%. Buoyed by this influx of foreign money, the benchmark index KSE 100 has gained more than 30% in the year-to-date period. According to market players, investor sentiment has seen a turnaround in Pakistan?s favour after the recently-held elections. KSE-100 breached the 20,000 mark for the first-time ever after the poll results were announced.

India has seen 22% y-o-y rise in FII inflows for the year-to-date period. However, the Indian markets have recently seen an outflow of foreign capital as FIIs have sold nearly $3 billion worth of shares since June. India’s benchmark Sensex has also lost nearly 7% (in dollar terms) in the current calendar year.

In the east, FIIs have been increasing their exposure to Vietnam. The benchmark VN index has surged more than 15% in CY13 on the back of 775% y-o-y rise in FII inflows.

According to market experts, the steep increase in FII inflows in some countries is primarily on account of the low base. ?Even though the y-o-y growth is high in these economies, the total size of FII inflows is measly,? says Ambareesh Baliga, managing partner, Global Wealth Management, Edelweiss.

FII exposure to these markets remains minimal compared with Indian equities. Pakistan and Vietnam have attracted $297 million and $165 million, respectively, to India?s $12.3 billion in CY13. Other economies that have recorded sharp y-o-y rise in FII inflows include Abu Dhabi (1,808%), Dubai (197%), Taiwan (196%).

Experts also feel that FIIs are looking at countries where they see prospects of higher returns. ?They are looking at factors like political stability and sound economy. FII flows have slowed down in India as the impending elections have created some uncertainty,? says RK Gupta, MD, Taurus Wealth Management.