China rally damps India flows, with investors repositioning tactically
China seems to have gained at the expense of India when it comes to foreign flows.
China funds cornered historic high flows of $6.2 billion this week, bringing total flows over the past two weeks to $7.2 billion. Foreign flows into India-dedicated funds, on the other hand, decelerated to $107 million, compared to an average of $300 million over the past two months, according to data from Elara Capital. Investors continued to pull out from midcap funds for the thirteenth week, with another outflow of $25 million this week.
This is a reversal of sorts as China had seen nearly $37 billion of redemptions since August of last year, of which $22 billion had moved into India.
“The recent economic stimulus announcement in China is attracting foreign investors who are tactically repositioning their intra-emerging market exposures. The Indian market which has witnessed robust FPI inflows over the last one year and which has generated very good returns for these investors, is being negatively affected by this repositioning,” said UR Bhat, Director of Alphaniti Fintech.
Bhat, however, believes that the Chinese economy would need much more than just the recent economic stimulus to recover from its economic woes. Unless there is a perceptible improvement in the short term, tactical asset allocation can quickly shift back to other markets, he said.
The Shanghai Composite Index has rallied over 20 per cent in the past five trading sessions, ending Monday. India’s bellwether Nifty 50 is down 4.6 per cent in the past five sessions as tensions in West Asia, fear of foreign funds reallocating monies to China and change in index derivatives norms spooked investors.
“FPI flows (both active and passive) to India may see some moderation depending on the extent of the ongoing rally in the Chinese market. We note that FPI inflows have been strong but seem to be largely of the passive variety. Active FPIs may look to deploy incremental GEM inflows into China. The Chinese markets are undoubtedly very cheap and the rally could sustain for a while,” said a note by Kotak Institutional Equities.
The brokerage doubts that active FPIs will sell a meaningful portion of their stock in India and move the same to China. Besides, Indian markets may be able to withstand the outflows given the robust domestic inflows and the high conviction displayed by non-institutional investors.
“MSCI China is now trading at 11.5x 12-month forward earnings which means the market is now vulnerable again if the recent easing measures do not succeed in triggering a re-acceleration in nominal GDP growth,” said Christopher Wood, Global Head of Equity Strategy at Jefferies.
Wood believes that interest rate cuts and the refinancing of existing mortgages announced last week are not by themselves that powerful a stimulus. “What would really excite the market and give further momentum to this rally would be the announcement of policies where government money is used to recapitalize over-leveraged private sector players complemented by related bank recapitalisations,” he said.