Inside a month, India ETFs see 16% drop in assets

India dedicated exchange traded funds (ETFs) have witnessed nearly 16% drop in their assets under management (AUMs) over last one month as fall in global equity markets along with rupee depreciation weighed on investor sentiments in the month of May.

Data sourced from Bloomberg show the combined AUM of top eight India dedicated ETFs shrunk 15.70% from $ 4,321 million (as on April end) to $3,643 million as on May 31, 2012.

The biggest loser has been France domiciled Lyxor MSCI India ETF, which has seen 17.1% fall in its AUM to $1,087 million. In percentage terms, the US based Ishares S&P India Nifty Index fund along with Powershares India Portfolio ETFs were the worst performers with 21.75% and 18.80% decline in AUM during the month.

Vaibhav Sanghavi, director, equities, at Ambit Capital said a slew of adverse data points globally along with uncertainty in the euro zone have led investors to sit on sidelines.

“The global investors have been cautious over last few weeks on euro zone concerns and weak growth numbers emanating from across the regions. Investors are adopting risk off strategy as they are selling equities and riskier asset classes across the markets and prefer to sit on cash,” he said.

According to EPFR global, a US based firm that tracks flows and allocation of funds domiciled globally, emerging market funds have witnessed weekly outflows of over $ 1 billion for four consecutive weeks.

“While Brazil and China have seen large outflows of nearly $1.2 billion each, India specific country funds witnessed outflows to the tune of $455 million with ETFs contributing nearly 80% to total monthly outflows,” wrote Saifullah Rais, analyst at Kotak Institutional Equities, in a note on Monday.

Gopal Agrawal, CIO at Mirae Asset Global Investment says that though the outflows from Indian markets have not been that much, the sharp fall in local currency and equity markets have resulted in deep cut in ETF portfolios.

The Indian currency depreciated by over 7% from 52.74 as on April 30 to close at all time low of 56.23 on May 31 as the dollar gained against all the emerging market currencies, what with investors flocking to safer avenues. With foreign investors staying off, the benchmark Nifty index too lost 324 points or 9.4% during the month, hurting ETF assets.

The Kotak fund flow report highlights that net allocations to India by all country fund groups fell by more than 15% in May.
Going ahead, the experts believe that the investors would continue to remain cautious this month as they await the result of key events in June.

“Though on one hand, valuations are attractive at this point of time, but there are some key events lined up like Greece elections, US Fed meet, EU summit and RBI policy review meeting. All these events are critical and may have a major bearing on market direction,” said Sanghavi.

Agrawal, too, feels that foreign investors are in a wait and watch mode and that inflows may eventually pick up once the clarity emerges.

“Barring the scenario of European crisis getting deeper, Indian markets won’t see much sell off from these levels. From macro perspective, worst of the fear related to high current deficit is behind us. With crude prices coming down, RBI also has some room to cut rates. The biggest driver for Indian equities would be reduction in fiscal deficit. Government needs to take some credible steps to reduce the same for investors to come in a big way” said Agrawal.