FPI pull out from equity markets hit India, Brazil benchmarks hard

By Urvashi Valecha

The rout of equities in Brazil and India has been the most in dollar terms compared to other global markets. The benchmark in Brazil has so far this year lost 54.7% in dollar terms, while India’s benchmarks – Sensex and Nifty50 – have dropped 37.3% and 37.7%, respectively, in dollar terms year-to-date. According to market experts, the sharp sell-off by foreign portfolio investors (FPIs) has driven the decline in Indian equities. In rupee terms, Nifty50 has declined by 34.6%. Data from Bloomberg show that, in dollar terms, markets in Indonesia, Thailand and the United Kingdom are the other worst performers after Brazil and India.

So far this year, Jakarta Composite has declined by 35.4% in dollar terms. SE Thai of Thailand and FTSE 100 of the United Kingdom have seen their dollar returns decline by 34.8% and 31.69% year-to-date, Bloomberg data show. Shanghai Composite of China is the best performing market so far this year in the on-going equities rout generating a negative return of 11.02% in terms of the US dollar.

The Indian markets receive strong flows through mutual funds but those are not enough to support pressure on indices caused by the FPI selling. According to Bloomberg data in March, they pulled out $8.3 billion from the equity markets but, year-to-date, the outflow is $6.6 billion. Deepak Jasani, head of retail research, HDFC Securities, explains that to reduce the dependence on foreign portfolio investments, India needs to improve her per capita income and in addition improve its savings and investment rate.

Data from Bloomberg show that developed markets have suffered a less severe correction with Dow Jones and S&P 500 of the US declined by 26.2% and 22.9%, respectively, year-to-date. Major European markets in the UK, France and Germany have seen their dollar returns decline by 31.6%, 30.5% and 27.8% since the start of the year. According to Ambareesh Baliga, an independent market expert, the developed markets possess more depth than Indian markets. “Developed markets have a lot of depth which means that heavy selling gets absorbed well thus the impact cost is low – whereas, in the current situation, the impact cost has risen in the Indian markets,” he said.

Emerging markets such as China, Hong Kong, Thailand, South Korea and Thailand have been weighed down in the on-going global equities rout but not as much as the Indian markets. Benchmarks in China and Hong Kong’s dollar returns have declined by 11.02% and 15.38%, respectively, since the start of the year. On the other hand, benchmarks in Taiwan and South Korea are down by 18.7% and 23.3% year-to-date in terms of dollar returns. SE Thai of Thailand and Jakarta composite of Indonesia’s dollar returns year-to-date have declined 34.8% and 35.47%, respectively.

Brazil was the only emerging market whose dollar returns have declined more than India, down by 54.7%. “In good times, Indian markets are amongst the most to benefit from FPI flows and so, in bad times, when the trend is reversed, we get hurt the most. Our FPI selling over the past two months is likely to be more than other emerging markets. Indian benchmarks are also overweight on financials that have taken a harsh beating because of the fear of rising NPAs and so, our indices could have fallen more,” said Deepak Jasani of HDFC Securities. The weightage of financial stocks in 50-share Nifty index is 36.51%, it continues to enjoy the maximum weightage as opposed to other sectors. Bloomberg data show that FPI outflows for markets such as Indonesia and Thailand year-to-date have been $771 million and $3.8 billion. Markets such as South Korea and Taiwan have seen an FPI outflow of $15.1 billion and $17.9 billion, so far, this year.