Why FIIs are buying
Business Standard, May 22, 2009, Page 9
There is a huge opportunity to bring about structural change, but the new govt must deliver
Akash Prakash / New Delhi
There is a huge opportunity to bring about structural change, but the new government must deliver, says AKASH PRAKASH
The markets have given a resounding thumbs up to the strengthened mandate given to the Congress party and Dr Manmohan Singh. Equity markets were up 17 per cent on Monday and then kept their gains the following day, with record volumes driven by a billion dollars of FII buying. FII flows look to remain strong, and it seems as if the markets have entered a new and sustained higher base level.
What accounts for this renewed FII interest? Why is everyone so excited about India once again?
FIIs are basically making the bet that in their new term, Dr Manmohan Singh and his cabinet will move ahead decisively on economic reform and policy action. The government knows what needs to be done, there are enough committees and commissions whose recommendations are lying unimplemented and investors are making the bet that the new government has the political will to push ahead. This government has the chance to fundamentally strengthen the country’s structural growth outlook.
There is a clear feeling that the quality of the mandate is vastly different today compared to 2004, both in terms of the relative strength of the Congress vis-a-vis its allies and the credibility of Dr Manmohan Singh within the Congress party itself. There are no excuses for non-performance this time. Many serious investors are also drawing positive longer term conclusions from the revival of national parties, greater correlation at the state level between governance and votes and the Indian public’s desire for a stable and centrist government. Talk of a maturing of the Indian democracy is all pervasive.
There were three main reasons why investors were cautious on India.
One was the proximity to Pakistan and the related geo-political risks.
The second was the risk of a severely fractured electoral verdict leading to a compromise candidate for PM, and the Third Front led by the Left coming to power. The risk of weak governance threatened to derail the country’s long-term outlook in the minds of investors. A weak government would not be able to tackle structural issues like the fiscal deficit or targeting of subsidies.
Third, the bears have been going on about the risks to the India growth story if global capital flows were to remain negative. The idea being, how will India fund its infrastructure deficit, given the limited local sources of long-term capital? Without strong inflows we cannot finance the fiscal deficit and 8 per cent GDP growth simultaneously.
Of the three bear arguments only Pakistan remains, as the electoral verdict has been far clearer than expected, and already Indian companies have regained access to global capital. In the last 10 days alone Indian companies have raised almost $2 billion of equity. Strong inflows, both FII and FDI, will restart a positive feedback loop of rising investment driving strong earnings, leading back to investment.
Investors now once again seem willing to place India along with China as one of the handful of countries which can get back to trend growth rates in 2010. Global players seem to be willing to re-rate the country and have the confidence to look through the short-term growth slowdown and focus once again on the long-term picture.
A second related issue driving market performance is the level of under-investment among investors. Most India dedicated funds are either too defensively positioned in terms of sectors and stocks or have too high a cash level. Among the regional funds, India for most shops had been an underweight, and now most are scrambling to catch up and in fact go overweight. A lot of regional investors are a little worried on China and seem willing to take some money off the table there and redeploy it to India. The India dedicated hedge funds are at best 30-35 per cent net long, and once again have the potential to up their exposure. Even locally one can expect the surge in confidence to push money into the markets either directly or through insurance and mutual funds.
Therefore one can expect to see continued strong FII inflows into India, as investors play catch up. At every dip one can expect strong buying. India’s very strong performance year to date (especially after the elections) only adds further pressure to not be seen being underweight.
There is also the strong possibility that many of the India funds will now get inflows, as retail flows chase performance, and most investors bet on further convergence between India and China’s market performance.
What can go wrong? Obviously, the new government can fail to act and continue dithering on policy action. If we see no action and just continued setting up of committees and groups of ministers, then that would be extremely unfortunate and set us up for huge disappointment.
Sign posts that investors will be using to calibrate the heightened expectations begin with the new cabinet. Obviously a technocrat becoming the FM would be seen as a big positive both from a capability perspective and in sending a clear signal that the Prime Minister is in charge. Investors will also want to see greater representation of youth as well as the critical infrastructure ministries going to capable ministers. There remains some doubt on Dr Manmohan Singh’s assertiveness and willingness to tackle entrenched political equations, and the new cabinet formation will answer many of these questions.
The next important milestone will be the budget itself. What is the game plan to tackle fiscal issues, better targeting of subsidies, infrastructure funding, the GST, etc?
Independent of the government being indecisive and frittering away the mandate, the only other negative in this scenario is the huge and almost inexhaustible supply of paper in the pipeline. Corporate India has already raised about $2 billion in the last 10 days, and the tap is now wide open. Combined with some disinvestment from the government, we could easily see $8-10 billion being raised in equity capital this year. This will act as a natural cap on the markets, though it will be great in boosting domestic capital formation and growth.
Valuations are not really cheap either, though earnings are likely to get upgraded, and this can also cap the markets upside, at least in the short term.
This election is being seen by many as a game changer. India has a real chance of breaking out, attracting strong inflows and being positioned in investors’ minds alongside China. We were always supposed to have an economic model more suited to today’s economic realities but with much weaker governance, could the governance handicap be reduced?
From the financial markets perspective, everything now depends on execution. The new government has the mandate, there is a huge opportunity to bring about structural change across sectors, and the policy road map is also clear. We need the new government to deliver.
Business Standard, May 22, 2009, Page 9
There is a huge opportunity to bring about structural change, but the new govt must deliver
Akash Prakash / New Delhi
There is a huge opportunity to bring about structural change, but the new government must deliver, says AKASH PRAKASH
The markets have given a resounding thumbs up to the strengthened mandate given to the Congress party and Dr Manmohan Singh. Equity markets were up 17 per cent on Monday and then kept their gains the following day, with record volumes driven by a billion dollars of FII buying. FII flows look to remain strong, and it seems as if the markets have entered a new and sustained higher base level.
What accounts for this renewed FII interest? Why is everyone so excited about India once again?
FIIs are basically making the bet that in their new term, Dr Manmohan Singh and his cabinet will move ahead decisively on economic reform and policy action. The government knows what needs to be done, there are enough committees and commissions whose recommendations are lying unimplemented and investors are making the bet that the new government has the political will to push ahead. This government has the chance to fundamentally strengthen the country’s structural growth outlook.
There is a clear feeling that the quality of the mandate is vastly different today compared to 2004, both in terms of the relative strength of the Congress vis-a-vis its allies and the credibility of Dr Manmohan Singh within the Congress party itself. There are no excuses for non-performance this time. Many serious investors are also drawing positive longer term conclusions from the revival of national parties, greater correlation at the state level between governance and votes and the Indian public’s desire for a stable and centrist government. Talk of a maturing of the Indian democracy is all pervasive.
There were three main reasons why investors were cautious on India.
One was the proximity to Pakistan and the related geo-political risks.
The second was the risk of a severely fractured electoral verdict leading to a compromise candidate for PM, and the Third Front led by the Left coming to power. The risk of weak governance threatened to derail the country’s long-term outlook in the minds of investors. A weak government would not be able to tackle structural issues like the fiscal deficit or targeting of subsidies.
Third, the bears have been going on about the risks to the India growth story if global capital flows were to remain negative. The idea being, how will India fund its infrastructure deficit, given the limited local sources of long-term capital? Without strong inflows we cannot finance the fiscal deficit and 8 per cent GDP growth simultaneously.
Of the three bear arguments only Pakistan remains, as the electoral verdict has been far clearer than expected, and already Indian companies have regained access to global capital. In the last 10 days alone Indian companies have raised almost $2 billion of equity. Strong inflows, both FII and FDI, will restart a positive feedback loop of rising investment driving strong earnings, leading back to investment.
Investors now once again seem willing to place India along with China as one of the handful of countries which can get back to trend growth rates in 2010. Global players seem to be willing to re-rate the country and have the confidence to look through the short-term growth slowdown and focus once again on the long-term picture.
A second related issue driving market performance is the level of under-investment among investors. Most India dedicated funds are either too defensively positioned in terms of sectors and stocks or have too high a cash level. Among the regional funds, India for most shops had been an underweight, and now most are scrambling to catch up and in fact go overweight. A lot of regional investors are a little worried on China and seem willing to take some money off the table there and redeploy it to India. The India dedicated hedge funds are at best 30-35 per cent net long, and once again have the potential to up their exposure. Even locally one can expect the surge in confidence to push money into the markets either directly or through insurance and mutual funds.
Therefore one can expect to see continued strong FII inflows into India, as investors play catch up. At every dip one can expect strong buying. India’s very strong performance year to date (especially after the elections) only adds further pressure to not be seen being underweight.
There is also the strong possibility that many of the India funds will now get inflows, as retail flows chase performance, and most investors bet on further convergence between India and China’s market performance.
What can go wrong? Obviously, the new government can fail to act and continue dithering on policy action. If we see no action and just continued setting up of committees and groups of ministers, then that would be extremely unfortunate and set us up for huge disappointment.
Sign posts that investors will be using to calibrate the heightened expectations begin with the new cabinet. Obviously a technocrat becoming the FM would be seen as a big positive both from a capability perspective and in sending a clear signal that the Prime Minister is in charge. Investors will also want to see greater representation of youth as well as the critical infrastructure ministries going to capable ministers. There remains some doubt on Dr Manmohan Singh’s assertiveness and willingness to tackle entrenched political equations, and the new cabinet formation will answer many of these questions.
The next important milestone will be the budget itself. What is the game plan to tackle fiscal issues, better targeting of subsidies, infrastructure funding, the GST, etc?
Independent of the government being indecisive and frittering away the mandate, the only other negative in this scenario is the huge and almost inexhaustible supply of paper in the pipeline. Corporate India has already raised about $2 billion in the last 10 days, and the tap is now wide open. Combined with some disinvestment from the government, we could easily see $8-10 billion being raised in equity capital this year. This will act as a natural cap on the markets, though it will be great in boosting domestic capital formation and growth.
Valuations are not really cheap either, though earnings are likely to get upgraded, and this can also cap the markets upside, at least in the short term.
This election is being seen by many as a game changer. India has a real chance of breaking out, attracting strong inflows and being positioned in investors’ minds alongside China. We were always supposed to have an economic model more suited to today’s economic realities but with much weaker governance, could the governance handicap be reduced?
From the financial markets perspective, everything now depends on execution. The new government has the mandate, there is a huge opportunity to bring about structural change across sectors, and the policy road map is also clear. We need the new government to deliver.
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