FPI Outflows

What is driving this sharp sell-off by foreign investors?

For the quarter ended September 2015, foreign portfolio investors (FPIs) sold $2.7 billion worth of equities in Indian markets. What has been responsible for this sharp outflow and why have FPIs continued to sell despite the positive surprise of a 50 bps rate cut?

Global risk-off trade…

Every since the US Fed started talking about a rate hike early this year, the investors have been subtly shifting towards a risk-off trade. A Fed rate hike will make US debt a lot more attractive, especially when the US Fed is willing to share a calendar of future rate hikes. Typically, whenever the US hikes rates, portfolio flows tend to abandon emerging markets and crowd towards the more stable economies like the US, Germany, Switzerland etc. As emerging markets have been hit badly by this risk-off trade, India too feels the pressure.

Emerging market stamp…

You can surely blame this on China! Ever since China embarked on its first devaluation a couple of months ago, there has been an effort from other emerging markets to catch up. Commodity heavy economies like Brazil, Russia, Venezuela, Malaysia, South Africa and Turkey have seen their currencies weakening in sympathy. One can argue that India is not exactly a commodity-dependent economy. But, that is off the point! As a part of the MSCI emerging market allocation, India tends to get branded and bundled along with other emerging markets. The FPI sell-off in India is hardly a surprise!

Fundamental worries exist…

India is not without its share of worries. Corporate results have disappointed for 3 quarters. Bank balance sheets are still bogged down by an overdose of bad assets. Company balance sheets are still vulnerable due to high debt/equity ratio and a large chunk of un-hedged foreign debt. These fundamental concerns, coupled with rich valuations, do tend to worry the FPIs. So there are elements of domestic concerns too!

Middle East syndrome…

Interestingly, a lot of the FPI pressure, this time around, has also come from the Middle East. Take the case of Saudi Arabia, the world’s major oil producer. With oil prices down over 50%, Saudi Arabia is drawing down on its sovereign reserves. At a peak of $740 billion, Saudi Arabia holds the world’s 3rd largest forex chest after China and Japan. In the recent past, Saudi Arabia has drawn down on its reserves by over 10%. This money has come from selling richly-valued equities in emerging markets to the tune of $70 billion. So it looks like oil is finally starting to hurt equity flows. After all, in an inter-connected market, few asset classes are spared the contagion! ©

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