FII dipstick: India story strong, but weightings..

The most influential and perhaps the most reticent player in the Indian markets is the foreign institutional investor. At the India Investment Summit 2010 held in Mumbai, three foreign investors talked about their holdings in India, what kind of investments they’d like to get into and the raising of capital for emerging markets such as India.

The level of conviction about the Indian story at the summit was strong. But this does not immediately translate into complete conviction among all classes of investors was the refrain.

“We are positive on India over the long term. However the weightage to emerging markets is still relatively conservative,” says Kees Verbaas, head of global emerging markets at Hermes Fund Managers, who has actively managed investments in public equities, adding that currency appreciation is one of the factors that they would be watching.

The rupee has swung 12.99% over the last year, from hitting a low of 52.08 against the dollar in March 2009, to a high of Rs 45.31 in January this year.

Volatile currency movements can eat into the returns of investors especially if the money is managed with a short-term perspective.
Christoph Avenarius (director of alternative investments at Credit Suisse AG) agreed that changing investor attitudes is not easily done.

“It is very difficult when you are coming from developed market-centric areas to raise funds for emerging markets and especially for a country in particular,” said Avenarius, who is involved in India through hedge funds.

For some, the increase is likely to happen over time. “We believe our investments will increase although Indian equities are richly valued now. The process of increasing allocation is not going to happen immediately, it is likely to be a gradual process,” said Farouki Majeed, senior investment director at California Public Employees’ Retirement System (Calpers).

Calpers currently has approximately a billion dollars in India funds, managed internally through index portfolios. Calpers is also involved as limited partners in some real estate investments and have some private equity exposure.

The latter of the two is a feature common to holdings through Credit Suisse as well, suggesting that the global investor is willing to look beyond the equity market for opportunities.

Yet, some bewilderment was expressed at the lack of development in certain other areas of the market. “I don’t not know if it is a cultural thing but there seems to be an unwillingness to issue debt, although there is no such hinderance in the case of equity. The debt markets need to be developed. There is the potential to attract an enormous amount of capital through debt if it is backed by a compelling story which certainly holds true in the case of India,” said Avenarius.

Nevertheless opportunities are being sought wherever possible. “We are exploring investments in infrastructure related projects although we haven’t found the right fit yet,” added Majeed.