Liquidity big tailwind for equities

As Charles ‘Chuck’ Prince, the former Citigroup chief said, you gotta dance when the music’s playing.

Liquidity unleashed by the European Central Bank — and soon the Federal Reserve — is chasing equities across the globe, and the music is unlikely to stop soon, say mavens.

So much so, India-dedicated exchange traded funds (ETFs) saw their largest fortnightly inflows in almost a year.

India ETFs received $175 million in the week ended January 25.

That follows a $222 million injection just the week before.

Put together, the $397 million that came in is the largest inflows in almost a year, according to Quant Capital.

The rise in markets means the top 10 India ETFs by assets under management have returned an average 19.92% over the last one month with the US-domiciled Wisdom Tree India Earnings fund popping up as much as 23.46%.

Vaibhav Sanghavi, director, equities, at Ambit Capital believes sentiment has changed over the last few weeks leading to strong foreign investor interest.

“The recent rally has lot to do with cheap money available globally with central bankers adopting easy monetary policies. The excess liquidity is finding its way across asset classes. Also, with European authorities working together to stave off crisis, the risk appetite seems to have improved. The economic data coming out from US in terms of retail spends and job market too has been encouraging,” he said.

Latest data from EPFR Global, which tracks flows and allocation of funds domiciled globally, suggests that weekly inflows into emerging market equity funds surged to a nine-and-a- half month highs of $3.49 billion.

The rise in emerging market currencies, too, have played part in large inflows. The rupee, for instance, has gained 7.5% so far this month against the dollar.   

When a local currency gains, foreign investors gain because they get more dollars per rupee when they remit home profits.

“Optimism, which began a few months ago from the developed markets on the back of strong economic data, has started to drift towards emerging markets since start of this year, with inflows expanding week-on-week.

“This year, emerging markets started with inflows of $462 million, which gradually expanded to $3.50 billion in just four weeks. The sharp strength in emerging currencies has been the main driver of flows to date,” said Sunil Jain, Rishav Dev and Sailesh Jain, analysts with Quant Capital, in a note on Friday.

There is liquidity-driven momentum in the markets currently, said experts.

“Growth in emerging markets seem to have bottomed out as central bankers shift focus towards easing, even as monetary authorities in developed markets maintain their soft bias on interest rates. Coming out of last year where we saw large outflows and extreme pessimism, the inflows have just started to pick up and would further gain momentum in the coming 6 to 8 weeks till they reach euphoric levels,” said Sandip Sabharwal, CEO, portfolio management services at Prabhudas Lilladher.

The Sensex, which has gained close to 11.5% so far this month on back of over Rs10,000 crore of buying by foreign investors, is likely to extend its run.

“Relatively lower valuations on historic basis along with the Reserve Bank of India’s move to infuse liquidity and change focus from controlling inflation to maintaining growth have also boosted investor confidence. The markets may continue to find support till the taps turn off,” said Sanghavi.

Or the music stops.