Bullish bets on India at new all-time high

GEM fund managers more overweight on India than ever before says Bofa-ML report

Fund managers who invest in global emerging markets (GEMs) are investing more in India relative to its weight among other EMs.

This so-called ‘overweight’ position is around 450 basis points, according to Bank of America Merrill Lynch data.

The bullish sentiment also poses a risk should flows reverse, according to its India Equity Strategy Report dated November 14.

“India OW is at an all-time high for GEM funds and the consensus bullishness creates the biggest risk to markets, in our view. The good news, however, is that domestic mutual funds have seen inflows and have been buyers post-elections after being net sellers for the past few years,” said the report authored by research analysts Jyotivardhan Jaipuria and Anand Kumar.

Foreign institutional investors were net buyers by Rs 656 crore on Monday, according to provisional exchange figures. They have been net buyers by Rs 92,195 crore so far this year.

Foreign investors are the most bullish on financials, where they are net overweight by 10.5 per cent. This is also because the index itself underwent a rejig, says the report. The MSCI India index excluded most private sector banks as foreign holding limits had been reached, leaving no more room for foreign buying.

“This is likely to further rise due to the recent exclusion of HDFC Bank. Based on the current market price, foreign institutional investors can only buy $2.6 billion worth of private banks (most of this is ICICI) and $5.6 billion worth of public sector banks,” said the report.

Foreign investors’ biggest underweighting has been on the information technology sector. The recent sharp outperformance of the software segment has resulted in foreign investors going underweight on all the three big IT companies — Infosys, Tata Consultancy Services and Wipro.

Foreign investors currently own 22.4 per cent of BSE 500 companies and a little over 40 per cent of the free float shares available to the public. This makes them the biggest owners in Indian companies after the promoters themselves, who own 52.1 per cent of the BSE 500.

“There are problems in a lot of other EMs. Russia, Australia and Brazil are commodity-based and affected by the current environment of declining commodity prices. The developed market is also going through problems, barring perhaps the United States. So, India is very attractive on a relative basis, although the risk of a reversal remains,” said Swapnil Pawar, business head and director at Karvy Capital.