Foreign fund flows to India may pick up by September: EPFR

Emerging markets have seen healthy fund flows over the past few weeks and Brad Durham, MD of EPFR Global said the total cumulative flows in the equity funds is about USD 17 billion year-to-date.

However, as far as the dedicated India funds are concerned, flow activities can be considered. "The disparity there is that investors apparently are not seeking dedicated exposure to India but, are getting exposure to India mainly through more diversified equity funds like the global EM equity funds," explained Durham.

Investors are cautious about putting money into the Indian markets due to growth concerns, inflation woes and a laggard approach towards reforms, opined Durham. In fact, if fund flows are taken into consideration, India is behind China, Korea, Brazil and Russia, he added.

Durham is also hopeful of flows picking up in India after the recent inflation data showed signs of easing and he expects it to begin from September.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Can you decipher how flows have done with regards to the dedicated Emerging Market (EM) equity funds at this point?

A: Yes, the last couple of months has been a period of risk-on and dedicated EM equity fund in particular have enjoyed three consecutive weeks of net inflows. Fairly modest volumes of inflows have been witnessed but, still clinging together three consecutive weeks of positive growth for the first time since February.

Now that brings total cumulative flows into EM equity funds to about USD 17 billion year-to-date and it's interesting that the flows have been in the broadly based global EM funds and net outflows from regional fund categories.

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Q: The other point possibly would be now just to narrow in within EMs and to focus on flows into India which have actually been looking very good in the past couple of moths. Could you just throw some light on the flow trend into India?

A: I think the flows have been good into India, certainly better than last year. If you recall last year India suffered about USD 6 billion of net outflows from the equity funds that we track. There are two ways of looking at it, with the data that we track. One is just looking at dedicated India equity funds and those funds have actually had net outflows on a YTD basis of about USD 350 million.

But, if you look at all the funds that are invested in EMs with some exposure to India, the total flows for India so far is about USD 1.3 billion of net inflows in Indian equities till August 15. The disparity there is that investors apparently are not seeking dedicated exposure to India but, are getting exposure to India mainly through more diversified equity funds like the global EM equity funds.

Even while the market is up, Sensex is up about 16-17% in local currency terms, it looks a little less stellar in dollar terms. If you are a dollar based investor, it's up about 11-12%. So markets are up, but the flow activity is negative so far with the dedicated India funds that we track.

Q: It will be therefore easy for you to compare how funds coming to India figure vis-à-vis other EM countries?

A: For all the individual country flows, India is behind the country flow leader which is oddly China with about USD 2 billion of net inflows even though the market is only up about 6% YTD. That's followed by Korea which has about USD 1.8 billion of net inflows followed by Brazil with about USD 1.6 billion. Russia also has a bit more inflows than India and India has net inflows of about USD 1.3 billion. So it's a part of the story so far.

With regards to investing in India, investors continue to be concerned about decelerating growth, inflation and whether the central bank would be able to ease monetary policy and stimulate the economy and also lagging reform efforts throughout the economy.

Q: What's your sense about the remaining part of 2012? Do you expect inflows at the same pace for India?

A: I think it has been fairly gourmet for India just in the last 4 or 5 weeks. I would expect things to pick up a little bit, especially as the inflation data in India has trended a little better than expected recently. I do think that flows could start picking up for India equities moving forward, especially from September.

Some of these forces that are leading investors to increase their appetite for risk is really having the reserve and ECB support for the economies and for the fiscal situation in both regions will be very positive if there is another round of quantitative easing. If ECB and Germany can come together and continue to support sovereign bonds in Europe, then the backdrop will be solid enough where investors will continue to take on more risk in their portfolios. That will push some amount of flows into Indian equities.

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Q: Focusing on the fabric of the money that's actually coming into India up till now, is it actually long only money which is coming in or is it more trading i.e. more hot money in terms of inflows? Hence are we more susceptible to a sudden outflow if in case there is a risk-off which takes place?

A: It's more institutional sources of money. We are seeing really little to no retail money. That’s been moving into emerging markets and India included. A lot of the flow activity is through ETF. Depending on whether you consider that hot or less hot money, certainly those flows can be easily reversed by an institutional investor.

Given the fact that much of the flow activity into India is coming from these broadly based global EM equity funds, I think these are longer term investments in emerging markets as an asset class. From that perspective, I would see the money being a little stickier than if it just flows into and out of Indian equity ETFs or even regional Asia based funds.

From that perspective, given the fact that this is a very different type of flow picture than what we normally see over these broadly based EM funds that are contributing most of the flow activity for most EMs. The data that I mentioned earlier with outflows from the Indian equity fund, the big inflows are coming from global EM funds. I think that money tends to be little longer term in nature than more targeted flow activity into these more targeted funds.