White Bulls In India Shop

Bolstering such positive sentiments are views expressed at a recent investor conference in Mumbai by Priya Sara Mathur, vice-chair of the investment committee of the California Public Employees' Retirement System, which has invested more than $100 million in India since April this year and is among the most conservative institutional investor. According to her, "The country profile in terms of growth as well as political and economic stability is a primary consideration in making investments for us." And if this firm thinks India is safe, and profitable too, other FIIs have no choice but to blindly follow it like an unthinking herd. And this seems to be happening as over a 100 FIIs have already registered with SEBI this year, a figure that's the highest in the last three years.

What's more, says Jyotivardhan Jaipuria, head (research), DSP Merill Lynch, "India is still relatively insulated in that markets here are less dependent on developments in the US or Europe." Most analysts also believe that valuations in emerging markets, particularly India, are half of those in developed markets in spite of much faster growth rates in the former. "So, we think there is a growth opportunity till this gap exists, probably for four or five more years," adds Jaipuria.

Despite the existence of these die-hard optimists, there are several caveats. What's happening this year is almost a repeat of what transpired in 2003. The FIIs played a similar game—as it seems—and made a killing on the exchange. Thus, there's no guarantee that the current bull run is likely to last forever. Says a Mumbai-based broker: "The FIIs have caught on to an easy way to book profits by hyping the India story on a yearly basis".

In January 2003, the Sensex was over 3300 points. Then it started dropping, and reached a low of below 3000 points by May 2003.Then it began to inch up, backed by the gushing FII inflows. During this calendar year, the foreigners pumped in a staggering $7.5 billion as the index breached the 6000-point mark by January 2004. Then came the selling pressure and the Sensex slumped. Politics only aided the downfall, as a Congress coalition assumed power in May 2004 with support from Left parties. And then, almost miraculously, the index raced northwards as FIIs increased their inflows.

Now consider the fact that FIIs generally book profits either towards the end of the calendar year (their financial year-ending) or mid year (half-yearly). And you can understand the game they are playing in emerging markets. In the initial period—the late 1990s and early 2000s—the FIIs normally sold a portion of their portfolio only in the months of November and December. But as others started imitating this strategy, the foreigners changed theirs and now seem to be selling during March-April-May, enabling them to book profits mid-year and buy at lower levels in June-July-August.

Another factor that has aided the autumn-winter boom in the past two years has been the string of exciting IPOs that bunched up in this period. Last winter, it was mega issues like ongc and gail that hit the market and this year saw successful debuts by TCS and NTPC. To give an example, the FIIs put in bids for nearly $8 billion in the recent NTPC issue, although their quota was capped at $450 million. Temasek Holdings, a Singapore-based private equity firm that has invested $1 billion in Indian markets since March this year, is believed to have purchased the largest institutional stake in TCS.

India may also turn out to be a seasonal flavour for the FIIs. Right now, it seems to be the right place to invest in, when compared to other emerging markets. One, the Indian market has given a 15-17 per cent annual return on investment on a compounded basis. Two, there are pitfalls in other "hot" emerging markets like Taiwan, South Korea and China. While the first two export-oriented economies are being hit by the falling dollar that affects their exports, China has decided to slow down growth of its overheated economy. Among the FII community, India is considered a "defensive" bet since its growth is dependent on domestic demand, rather than exports. The tide may easily turn against India if the IPO pipeline dries up, the dollar gains lost ground and other Asian economies begin to perform well.

Bulls like Jaipuria and Menon think that since this year's IPOs have been successful, more companies are likely to follow suit, thereby increasing the number of large-cap firms entering the market both from the private sector and PSUs. Also, FIIs are looking not only at large-cap firms in known sectors like IT and energy, but also at mid- and small-cap (or mid- and small-size) companies in sectors like auto components and textiles. To cite statistics, a study by a foreign brokerage firm indicates that only 50 per cent of FII money is invested in large companies that have a market cap of between $1-5 billion. "Now that smaller companies are seeing investor interest, they are tempted to enter the market," says Jaipuria.

One will have to watch the interest rate trends, both globally and in India. Already, they are going up across the globe. Experts actually feel that 2005 may turn out to among the worst year for global economies. US rates, which are already 2 per cent, may end up at 3.5 per cent by end-2005. Indian rates too are rising as inflation refuses to drop dramatically. What can spell doom is the fear of a global recession or stagnancy.To explain to the uninitiated, higher interest rates in the US make it more attractive for FIIs to invest in America. But higher rates in India may pull down domestic demand and slow down growth. Similarly, a global recession will force FIIs to put on hold their plans to commit additional amounts in emerging markets.

At the moment, the FIIs aren't unduly worried on these fronts. Explains Norman Sorensen, president, Principal Global Investors, "Rising interest rates in the US are the result of an expanding economy and the removal of monetary accommodation by the Federal Reserve (the US central bank). The growing dynamism and emerging consumer sector in India are strong attractions. So, higher rates are unlikely to impact our plans in India. However, inflation could be a concern for India in the future, and we remain alert to it."

No one can, however, deny that there's a shift in the manner in which the FIIs look at India. Ever since India opened its gates to foreign investors, only the risk-taking hedge and growth funds gobbled up Indian stocks. But now the long-term—also risk-averse, serious and conservative—players like pension funds and insurance firms are eyeing the Indian paper. Fortunately, the funds that came in early have demonstrated success and minted money, forcing others to wake up and add India to their emerging markets portfolio.

Foreign investors are also buying the current India story of a sustained 6.5 per cent annual economic growth, apart from higher projected financials for leading Indian companies. Two of known India's reformers—PM Manmohan Singh and FM P. Chidambaram—are playing their part to a cue. That's reflected in the way they smoozed with foreign investors at recent global investors meets arranged by Merrill Lynch and Morgan Stanley in New York and London. Last week, a top official of Goldman Sachs, a major global investment firm, took a group of 20 investment managers of varied nationalities to meet both politicians and corporate honchos in various Indian cities. The bulls seem to be on the rampage yet again—only this time most of them are white-skinned men in their pin-striped suits.