Global funds' India bullishness dips to lowest in five years

Consensus overweight currently slips below 100 bps, down from 800 bps in 2015

Gone are the days when India attracted more than its fair share of foreign flows. Global funds’ India preference has dropped to the lowest since 2013 amid a deteriorating macro environment, with weakening of the rupee and surging crude oil prices. 

Currently, the consensus ‘overweight’ on India vis-à-vis its weight in the influential MSCI Emerging Market (EM) index is around 100 basis points (bps), down from 800 bps in 2015. Even at the time of taper tantrum in 2013 when foreign investors were shunning EMs, funds were overweight 300 bps on India. The weight assigned to India by index provider MSCI in the EM index, which is tracked by funds with assets of over $1.5 trillion, is around 8.5 per cent, while the consensus India weight is only 9.5 per cent, the data provided by foreign brokerages show.  

Back in 2015, India was the blue-eyed boy for foreign investors, with the peak consensus weight being 16 per cent. This meant, for every $100 being deployed towards EMs, India received $16, which has now dropped to $9.5. While the exchange-traded funds (ETFs) simply follow the weights assigned by MSCI, the actively-managed funds use their discretion, depending on their view for each country.

“Investors were running an exceptionally high overweight position around three years back. 

In early 2015, they were double-weighted versus the benchmark. Now, India is seeing investors reduce their positions,” said Jonathan Garner, EM equity strategist, Morgan Stanley, which recently cut its India overweight to 50 bps, from 150 bps last year.

“We are still overweight India, but less than before. We assess opportunities in India and other markets. One of the things we have been looking at is the sensitivity to oil. India has the third-highest oil-to-gross domestic product ratio among the countries in our universe,” said Garner.

The cut in India’s overweight stance has come at a time when global funds are pulling back from EMs. So far this year, the outflows from US-based ETFs investing in EMs have been nearly $4 billion. However, as and when these funds commit fresh investments, India will get a smaller share than what was received previously, potentially leading to underperformance.

“India is presently facing a difficult macro environment along with domestic uncertainty. The rise in crude prices has dampened sentiment and hardening US bond yields is making foreign investors take a relook at their risk-reward matrix. On the domestic front, the busy election season has led to increased volatility in the market. All these factors are forcing long-term foreign institutional investors (FIIs) to look for alternatives elsewhere,” said Himanshu Srivastava, senior research analyst at Morningstar Advisers.

The rupee has depreciated by about 6 per cent this year. The falling rupee affects dollar returns for foreign investors. Fortunately, the drop in foreign investor interest is being more than made up by domestic mutual funds (MFs), which are flushed with investor inflows.

So far this year, MFs have pumped in Rs 631 billion into domestic stocks, even as FIIs have pulled out Rs 71 billion (over $1 billion). Besides Morgan Stanley, a host of foreign brokerages, including CLSA, too, has cut its India weight.

Another reason behind foreign funds pruning India exposure is the country’s valuation premium. Currently, India’s benchmark Sensex trades at 17.5 times its 12-month forward earnings estimate. In comparison, the MSCI EM index trades at just 11.4 times.

“FIIs are finding Indian markets richly valued, compared to other EMs. Besides the busy election season, another key monitorable would be the impact of policy decisions like the bankruptcy code and the goods and services tax, which could take at least a year to become visible,” said Saion Mukherjee, head of equity research, Nomura.

However, not all see FIIs’ bearishness as a reason to be negative. “When the consensus view turns bearish, it often is a good opportunity to buy. I keep looking for such contrarian signals,” said Shankar Sharma, vice-chairman and joint managing director at First Global.