Rising Re attracts more foreign investors

Dollar investments in India give better returns than in other Asian markets

MUMBAI: Foreign investors pumping money into Indian equities seem to be driven more by the rising rupee than by stock returns.

In the last eight trading sessions since the Fed cut interest rates in the US, overseas investors have bought Indian equities worth Rs 13,585 crore, (including the provisional inflow figure of Rs 2,275 crore on Friday).

A DNA Money analysis found that the weakening greenback is boosting the real returns of dollar investors across emerging markets.

The rupee, which is the biggest gainer among Asian currencies, is making the real returns of Indian stocks far more attractive than their regional peers.

For example, the Hang Seng of Hong Kong and Kospi of Korea have given year-to-date absolute returns of 35.7% and 36.8%, respectively.  Though the Sensex return has been far less at 25.5%, the math changes significantly for the dollar investor.

With the appreciation of the Indian currency, a thousand dollars invested in the Sensex on January 2 would fetch $1,394 today — a return of 39.4%.

The same amount in the Hang Seng and the Kospi would be worth $1,362 and $1385, respectively, as the Korean won and the Hong Kong dollar have appreciated only marginally.  A dollar investor in Indonesia’s Jakarta composite would have earned just $1,315, since the Rupiah has weakened even marginally.

Had the Rupiah remained in its January 2 level, the dollar investor would have earned just $14 more. Brazil and Philippines are the other markets which are reaping the benefits of this cocktail of a booming market and strengthening currency.

A $1,000 investment in Bovespa, the Brazilian index, on January 2 would fetch $1,572 today.  The year-to-date return of the Philippines market also rose from 20% to 31% by a 9% appreciation in Peso.

According to Anil Sahgal, director, strategy, and CIO, Aviva India, “The recent sharp run-up in the markets has to be seen in the backdrop of the rate cut by the Fed. There have been massive inflows into India following the rate cut.”

“For example, the average net daily FII inflow this year into

India has been about Rs 260 crore. For the past one week, it has been about Rs 1,500 crore. This is driven by the exchange-rate differentials and the expected returns due to currency appreciation,” he explained.  While such huge inflows are targeting exchange gains as much as market returns, the flood of dollars these investors bring in is further beating the dollar down and pushing the local currency up.

Stephen Jen of Morgan Stanley Global Research said in a September 27 report on the US dollar: “The combination of the Fed’s rate cut(s) and a declining dollar will likely prove to be good for many emerging markets, almost too good in some cases.”

And India seems to be right on top of the list of those ‘some cases’.  “Many of the countries that have ‘sticky’ exchange rates - those that are either hard-pegged to the dollar like Hong Kong and the GCC countries or those that are not very flexible vis-à-vis the dollar (such as the CNY) - will be pressured to mimic the Fed’s monetary policy to preserve the de facto currency peg, when the domestic conditions demand a tighter monetary policy stance,” Stephen said.

Even the Reserve Bank of India (RBI), not very comfortable with the prospect of a sub-40 rupee, announced a slew of measures, relaxing norms for overseas investments by locals, to reverse this flow last week.

But this may not be enough to stem the rupee’s upward journey. Phani Sekhar, fund manager, Angel Broking, believes so.

“These are fresh investments. A set of new investors have come in and is creating a portfolio. That’s why we see large caps galloping every day. Every other day, some new institutional investor is entering the market. I don’t see this flow ending in a hurry,” he said.

While rate cut in the US has made borrowing cheap, efficient markets will attract more money, experts said.

With the Indian economy continuing to grow at a healthy pace of 8% plus and a strong corporate performance, driven both by the consumption and investment boom, India remains one of the most efficient markets in the world.

The rupee is just the icing on the cake.