India may miss out on cash flood to EMs

Global investors are starting to move away from safe havens and are eyeing the better-performing emerging markets including those in Asia Pacific. India, however, may not figure in their to-do list, possibly on account of valuations being more expensive than its peers.

The BSE Sensex, reached an almost 2.5- year high, closing at 17985.90 on Tuesday. The rise has been accompanied by strong foreign institutional inflows of Rs 10,297.38 crore in  June and nearly Rs 7,000 crore in July.

Perhaps as a result, other emerging markets appear more popular, even in the Asia Pacific region. “Asia Pacific investors have increased their China Overweight and it is the most favoured among Asia Pacific investors in July. Korea, India and Australia are the least favoured in the region,” said a Global Emerging Market Survey authored by Michael Hartnett, Michael Penn and Jacky Tang of Bank of America Merrrill Lynch.

“GEM funds...have been the only fund group that have taken in billions of dollars of new money during the period and have been 590 bps underweight Asia in their portfolio. China, Korea & Taiwan are the likely beneficiaries when they unwind positions,” said a Citigroup Global Markets report authored by Elaine Chu and Markus Rosgen.

Surprisingly, while the view on Europe has darkened, allocation towards safe-haven assets has fallen.

Gold and the US markets have both fallen out of favour. A net 24% of investors think gold is overvalued, up from 21% last month, according to a Bank of America Merrill Lynch global fund manager survey report by Gary Baker and Michael Hartnett.

“Having acted as a default safe-haven region in recent months, sentiment on the US continued to ebb during July. Fund managers cut the US overweight to just 7% from 20% in June,” it noted.

Another report by the organisation noted that nearly half of European fund managers expect a weakening economy or even a double-dip. This is a sharp turnaround from 62% of managers expecting strengthening just three months ago.

This contrast could be explained by the surfeit of cash in the global financial system, suggest some.

“There is so much liquidity that investors could be looking beyond safe havens for other asset classes in which to park their capital. In light of concerns over inflation it is possible that industrial commodities could see some buying,” said Naveen Fernandes, head-institutional broking at KRChoksey Shares and Securities.