FIIs diverting their investments to emerging economies

Having sold Indian shares worth close to Rs 5 trillion since beginning of this year, the overseas investors seem to be ploughing back the money to the bond market in India and abroad as well as equities in other emerging economies such as in Latin America.

After a sharp rally for the past few years, the Indian stock market has been under an intense bear grip since January this year, which has seen the total value of all listed stocks here plunging by more than a third or over Rs 25,00,000 crore.

Out of this, FIIs are estimated to have incurred a loss of close to Rs 3,00,000 crore, which is also equivalent to nearly one-third of their total holdings before the downslide began on the bourses.

FIIs are estimated to have sold shares worth more than Rs 4,70,000 crore so far in 2008. While the overseas investors have also purchased shares worth about Rs 4,40,000 crore in this period, on a net basis, they have pulled out investment worth over Rs 25,000 crore (over $6.5 billion).

In the wake of continuing negative global cues such as rising crude prices, bearish phase in international markets and domestic concerns like soaring inflation and moderating economic growth, the analysts expect FIIs to continue to remain net sellers in Indian equity market in coming months.

Although the experts are divided on where FIIs are diverting their investments, some believe they are getting attracted to equities in Latin America and bonds in the US.

"The FIIs are mostly covering their losses and investing in Latin American markets. With the currency appreciation and higher interest rate differentials, Latin America is increasingly becoming attractive for the foreign investors," leading rating agency Crisil's Principal Economist D K Joshi said.

Some analysts also believe that the overseas funds going back to their local markets.

"The FIIs are placing their bets safe. They are taking the funds back and investing in the US bond market. They are mostly booking profit and recovering losses," PriceWaterHouseCooper Executive Director Sanjay Hegde said.

Even in India, while FIIs have been net sellers in the equity, they have been mostly buyers in the bonds with a net investment of more than Rs 2,000 crore (over 500 million dollars) so far in 2008.

Economists feel an immediate reversal in FIIs' stance towards Indian equities is not expected soon because of the prevailing uncertainties in the crude market and the country's political scenario.

"With the crude predicted to touch 175 dollars a barrel and the Indian currency depreciation, FIIs will turn their focus to the commodity market which has emerged as an alternate asset class. They would prefer to stay invested in the commodity market and hedge against inflation," Crisil's Joshi said.

The analysts feel that a bounce back could be seen around December with the soaring oil prices likely to cool down by that time.

"With the reduced risk appetite of the FIIs and the Indian growth moderation, the foreign investors are likely to turn their focus back to India towards the end of 2008 when the political and crude related uncertainties are expected to tame down," Joshi added.