Pace of flows into Indian market slowing down: Morningstar

In an interview to CNBC-TV18, Dhruva Chatterji, senior research analyst at Morningstar spoke about the fund flow patterns into Indian market and his outlook. 

Below is an edited transcript of the interview. Q: How much do you cover in terms of the ETF universe investing into India? What have you seen over the course of the last few weeks? Have there been significant redemptions/outflows?
A: In Morningstar, we cover the India-focused offshore funds and ETFs together. Offshore funds is a larger universe; ETF universe is little small for the India-focused funds. However, similar to last year, year-to-date, up to end of March, India-focused offshore funds in ETFs together have seen net outflows of about USD 1.2 billion.
Last year, for the full year 2012, India-focused offshore funds and ETFs together has seen net outflow of about USD 1.8 billion. Therefore, there were still inflows coming into India but offshore focused funds were seeing outflows. It dragged down the overall figure. So, that is the India focused funds universe.
Now, a big contributor flow into India is also emerging market funds because they have a decent allocation to India in their portfolio. So, year-to-date emerging market funds and ETFs together have seen about a net inflow of approximately USD 30 billion. Bulk of it came in the first month of the year that is in the month of January, USD 18 billion came in January followed by USD 8 billion inflow in February and that further reduced to USD 4 billion.
So, what is happening, in a nutshell, is even though flows continue into emerging market funds, the flows have slowed down quite significantly and they are getting allocated to some other avenues as well as themes. Q: While the pace of inflows has reduced as you are suggesting, what is more worrying is that in April there has been many days of net foreign institutional investors (FIIs) selling. Where could that be coming in from?
A: A contributor of that would be India-focused offshore funds and ETFs, like I mentioned, they continue to see outflows and probably the data for ETFs is not fully updated as of yet. But, at least the funds that have declared data, show that there have been outflows lately and that is not being seen in case of India-focused ETFs. Last year, India focused ETFs saw USD 800 million of inflows, whereas this year, year-to-date, up to end of March, they have seen outflows of about USD 160 million. So, they are the primary contributors for the outflows. Q: Do you also keep an eye on regional ETFs that invest into India as part of their portfolio because the observation seem to have been that India as a country-dedicated fund or story was not pulling that much money? Any anecdotal evidence of what is happened with some of these regional funds and whether there has been redemption pressure or pullouts over there?
A: Two large contributors of inflows: 1) emerging market funds; 2) Asia-Pacific funds and Asia ex-Japan funds, which have seen large uptick in flows this year. As per Morningstar data, year-to-date Asia ex-Japan funds have seen USD 9.5 billion inflow. This is up to end of March. The last few days we have seen sporadic flows around but the entire data has not updated as of yet. Q: Are you also beginning to see data or evidence suggesting that a lot of money is going to either Japan-specific funds or Asia funds that include Japan in its basket because that is what we are hearing that that market has begun to pull a lot of money to the determent of others?
A: That is correct. I think two avenues have been pulling in money. One like you mentioned the Japan stock funds. So, I will start off with that first. Obviously, the aggressive monetary policies helping out, Nikkei is up 28 percent in local currency terms and if I look at Morningstar data out of Japan’s stock funds, which are domiciled in the US, they have pulled in close to about USD 5.5 billion of inflows year-to-date up to end of March. Last year they saw outflows.
Therefore, definitely an uptick in Japans’ stock fund but I think a bigger uptick has been in domestic US stock funds and as per our data, for the first three months of 2013 that is January to March, US stock funds have seen cumulative inflow of about USD 38 billion. This stands as good inflow because 2012 and 2011 has been very disappointing year of flows for domestic stock funds. They have seen in each of these years, outflows in excess of USD 45 billion dollar. So, some of the money, which has moved out is again coming back into US stock funds and also partially in Japan’s stock funds.