Foreign fund inflows into emerging markets in general, India included, has slowed down of late and the trend could persist for some time, says Markus Rosgen, Asia-Pacific Equity Strategist, Citi.
According to Citi data, funds investing in emerging markets have seen net outflows for 10 weeks. Worst hit has been the Global Emerging Markets (GEM) category of funds. In all, Citi estimates that investors have net pulled out USD 873 million from Emerging Market (EM) funds in this period.
Also Read: Emerging markets' output growth slows in Dec: HSBC
Speaking to CNBC-TV 18, Rosgen said investors prefer developing markets over EMs, at this point. Among EMs, India still remains among the preferred markets, he says. But he cautioned that inflows into India will be slower as it has received a higher share of foreign money in recent times. In other words, many foreign money managers already have a sizeable exposure to India. Rosgen sees policy execution as key to FII perception about India.
Rosgen is not bullish on gold at this stage.
Below is the edited transcript of Markus Rosgen
Q: The start of 2014 has not been that great for the Indian equity markets in fact the foreign institutional investors (FIIs) are even sold in the cash markets over the last few days, what are you observing by way of flows from the FIIs into the Indian equities?
A: In terms of flows, it continues to be quiet for foreigners in terms of the whole emerging market universe. So interesting thing is that when you look at flows into India over the course of last 12 months, India has had a disproportionate amount of foreign flows, it is very consensus to be overweight India and it doesn’t matter whether you are speaking to investors in Europe or in the United States, everyone is very much enamored with the Indian equity markets. So in terms of flows, what we are still seeing is people prefer developed markets to emerging markets, within emerging markets one market that certainly had its fair share of flows then that should be India.
Q: What would you pick as trends for the current quarter, the January-March quarter? Would you say India would remain favoured because your note indicates that emerging markets as a basket actually saw substantial outflows?
A: If you look at the emerging market universe it has seen outflows, but within that India has obviously been one of the markets that contrary to that had actually seen inflows from foreigners. The vulnerability that we would suggest given that India is part of the Fragile Five is that if there are any fears in terms of interest rate rises in the US or a stronger dollar then you are obviously very susceptible to that in terms of the Indian equity markets. So from a flow perspective we still think the beginning of the year is going to be quite tough.
Investors still continue to be quite risk averse, they continue to be quite negative on emerging markets and so given that they are already overweight on India I don't think they are going to increase their overweight substantially in Q1 of the year. So other markets are probably more likely to see a little bit more flows than India.
Q: Is it quite likely or do you see a possibility of investors reducing their overweight stance in India?
A: I don’t think there is going to be a necessary reduction in terms of the overweight but relative to other markets, I think flows into India will underperform not just only because of the fact that India is already very much a consensus overweight flows have been very strong whereas flows have been very weak into other markets like Korea, Taiwan or China for instance within the Asian region.
Q: For the past many months, the trend has been outflows from bond funds and into equity funds, especially developed market equity funds, that broad trend remains you think for Q1 of 2014?
A: Yes. In terms of our global view, it is still very much that people will be sellers of bonds and buyers of equities for choice, but as you correctly highlighted that has been very much a developed market phenomenon and the emerging market where people have been sellers in the emerging market bonds as well as sellers of the emerging market equities so the kind of great rotation that people like to coin haven’t occurred yet in terms of the emerging market.
So people have been building up cash in terms of bank deposits, they have been sellers of bonds but they are yet not buyers of equities. So it is quite interesting that we in terms of the emerging market investor seem to be a lot more risk averse than developed market investors.
Q: Like in bonds, a lot of outflows were seen also out of commodity funds, especially gold funds, how will that trend work in Q1 or in 2014 as a whole, will gold continue to lose glitter?
A: It is interesting. Gold is normally kind of a defensive posture. I think with the improvement in the global economy, we are seeing growth come back in Europe and pick up in growth in the United States. People are kind of become a little bit more risk seeking and therefore there is no need for them to continue to hold on to gold as ...so we are not particularly bullish on the outlook for gold. We are more bullish on the outlook for equities as part of that risk trade.
Q: Any events that you foresee in the near or medium-term, which could alter the way flows have been flowing into the emerging markets and particularly India?
A: One area that is always of interest is dollar. If the dollar continue to rally and be stronger then that tends to halve the negative repercussions on flows in particular into emerging markets, so that is one area to watch. The other areas are obviously what is happening to the fragile five in terms of the current account, are they continuing to improve and as we continue to see improvement in current account, people will again become a bit more risk seeking, so the dollar is key in the very short-term and slightly longer term is what is happening policy wise as regards the current account deficit.
Q: At the moment you do not see any risk to inflows into equity funds of US, Europe and Japan, do you?
A: In terms of developed markets, the great rotation circle has begun, people have become little bit more accepting of taking some risk through equities and the big surprise has been that historically people in emerging markets have been more risk seeking that investors in developed market.
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