Foreign investor inflows resume on rupee rebound

The Indian equities are now the most under-owned by Asia Pacific investors in the region even as a slight rebound in the rupee over the last two weeks has led to resumption in FII inflows.

India has fallen further out of favour, with net 27% of Asia Pacific fund managers now underweight the country, according to the latest fund manager survey conducted by Bank of America Merrill Lynch during last week.

The fund manager survey also stated that the investors continue to remain underweight on emerging markets despite the strong rebound in sentiment towards China.

“Even though fears of a China hard landing have largely been allayed, investors remain staunchly bearish on emerging market equities. A net 18% of global investors are underweight EMs, among the lowest exposures since Nov 2001,” wrote Michael Hartnett and Brian Leung, strategists at Bank of America Merrill Lynch in a report on September 17.

However, at the same time, investors stay optimistic, indicating that they see the best value in emerging markets in almost a decade. “A net 36% of the panel says global emerging market equities are the most undervalued – or cheapest – of all the regions. This is the strongest undervalued reading since January 2004,” wrote Hartnett.

The cheap valuations, meanwhile, have led to strong inflows into the EMs after five straight weeks of outflows. As per EPFR Global, the funds tracking agency, EMs attracted $2.6 billion inflows during the week ended September 11, with $3.2 billion going into regional ETFs. India, too, attracted $812 million during the same period, third highest after Korea and Taiwan.

Abhay Laijawala and Abhishek Saraf, equity analysts at Deutsche Bank, endorse the positive trend. They believe that the fears of FII capitulation have largely receded, post new RBI governor’s initiatives to support the rupee.  

The duo believe that while any potential weakening in US bond yields and reduced fears of an aggressive tapering by the Fed will aid flows, a more sustainable return of faith will critically hinge on the government’s commitment on drawing a line on the fiscal deficit at 4.8% of GDP.

“Investors are keenly expecting a fuel price hike (both one time as well as a higher monthly calibrated hike) as an endorsement of the commitment to fiscal discipline. Convergence of political will on critical economic issues also bodes well,” wrote Laijawala and Saraf.