India ETFs see AUMs shrink 20% in 2 months

India dedicated exchange traded funds (ETFs) have shed nearly a fifth of their assets under management (AUMs) in the last two months as redemption pressures increased and portfolio values dropped due to the market slide and currency depreciation.

As per data sourced from Bloomberg, the total AUMs of five of the biggest India dedicated ETFs has fallen 18.77% from $3,431 million as on October 20 to $2,787 million as on December 20.

The biggest loser has been France domiciled Lyxor MSCI India ETF, which has seen a 21% cut in its AUM to $1,111.17 million. Singapore based Ishares MSCI India ETF and Hong Kong domiciled Ishares BSE Sensex India have also seen 23.5% and 19.57% declines, respectively, over this period.

Experts believe the worsening macroeconomic situation in India in recent months has prompted some of the ETFs to sell.

“The redemption pressures, which have had a bearing on how markets have behaved in recent times, are fairly clear. Investors’ risk appetite has been waning on account of global issues, more so for Indian equities. The India story and the country’s economic stability are being questioned by foreign investors,” said Saurabh Mukherjea, head of equities at Ambit Capital.

Indian markets have lost nearly 10.4% in the last two months on concerns related to widening fiscal deficit, persistent inflation and policy inaction.

The other big overhang for foreign investors has been the sharp depreciation in currency, which has fallen nearly 6% from 50.27 against the US dollar to 52.71 as on date.

Alroy Lobo, chief strategist & global head equities, Kotak Asset Management, believes the ETFs by nature decide allocation based on macro factors and have sold after the situation on currency got worse. “Flows are a function of fundamentals and valuations. Even though the valuations are at reasonable levels, fundamentals are currently challenging. So, it’s a call each institution would take based on its risk appetite. Some of the ETFs may have taken a macro call of selling based on India’sv challenging macros such as high current account deficit and depreciation in rupee etc,” he said.

According to a fund flows report dated December 16, authored by Sunil Jain and Sandeep Tandon of Quant Capital, redemptions from India ETFs during the week ended December 14 accelerated sharply to $338 million after smaller outflows of $75 million seen the previous week.

Going ahead, experts believe the market conditions would continue to remain grim and this may lead to further redemptions in case some major global shock hits us.

“Even the long only foreign funds are facing redemption pressures, but are somehow managing to deal with the situation without liquidating their positions as yet. The rally seen on Wednesday shouldn’t be seen as a major relief rally as it came on the back of a sharp sell-off over the last several days and encouraging global cues. The economic fundamentals remain quite worrisome and markets are likely to resume their downtrend in coming days,” said Mukherjea.

However, some do not expect major selling by long only funds, given their experience and understanding of Indian markets.