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Of late, the markets have been preoccupied with what is known as the 'Great Rotation Theory'. Proponents of this theory believe fund managers could pull out money from risky assets and plough it into stable, developed markets. Consider this: Since January this year, Japan's Nikkei is up 25 per cent and the Dow Jones Industrial Average is up eight per cent. In comparison, the Sensex is down two per cent. As a result, many are wondering if foreign institutional investors (FIIs) would sell India.
So far, the chance of such an outcome is slim. In 2013, FIIs have pumped in Rs 54,728 crore despite the political turmoil, disappointing Budget and weak macro-economic data. The HSBC Fund Managers' Survey says Asia Pacific ex-Japan equities are favoured by 50 per cent of fund managers, while preference for North America equities is down.
There are several reasons why FIIs might not pull the plug on Indian equities just yet. Historical data suggests FII selling is heavily driven by global developments more than local. So, in the last 13 years, FIIs have sold Indian equities only twice (2008 and 2011) in a big way. Even during these periods, selling by FIIs in India has been less frequent compared to other countries. Anand Shanbhag of Avendus says: "Of the 11 months since January 2011 when FIIs were net sellers across the globe, they were buyers in India in three months. The scale of FII selling in India is also milder."
Though FIIs have sold equities worth Rs 901 crore in April, the last few days have seen some buying, too. While India's share of overall FII buying is increasing, it accounts for a much smaller portion of the sell-off. Even when FIIs sell, India accounts for less than 10 per cent of their overall sales from risky assets. The sales are less than the aggregate purchases that they make. The aggregate value of FII stocks is down just six per cent in 2013. The market value of net purchases between 2009 and 2013 has dropped merely six per cent since January 2013, due to moderated selling. This is a small decline compared to the 25 per cent erosion seen in 2008. The net purchase of the past four years comprises about half the value of the FII portfolio. Experts believe that unrealised gains could also prevent a major sell-off just yet. More than Indian risks, if there is a major crisis globally, foreign flows could turn negative and Indian equities may see a major sell-off.
