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Home > Media > FIIs see no immediate triggers for a re-entry

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FIIs see no immediate triggers for a re-entry
Hindu Business Line
27th July 2008

As Head of Kotak’s International business, Mr Paul Parambi advises and manages ‘India’ investments for several offshore institutions and high net worth investors. Business Line quizzed him on the FII perspective on the recent stock market meltdown.

Asserting that Kotak has been advising its offshore clients to build Indian equity exposures with a long-term view, he nevertheless makes the point that the recent fall has significantly altered the FII perception of Indian stocks.

Excerpts from the interview:

How have offshore investors altered their risk perception of the Indian stock market after its 40 per cent decline, making it among the worst performing in the region?
The perception of investors to India has changed very significantly over the last few months. While the long term positive view remains relatively intact, there is a significant change in the short-term view.
Early this year, most investors were fairly sanguine about the market drop, and were merely waiting on the sideline to time their entry.

However, as the market has continued its decline, investors are much more wary, seeing no immediate triggers which require a quick re-entry into the Indian market. Many investors have also downgraded their target short-term weights on India and the region.

What is your advice to offshore clients who have already lost considerable value in Indian stocks and to its currency? Do you recommend a move into cash?
As asset managers, we have all along been advising investors to take a 3-5 year view while investing in India. While the short term market direction is presently uncertain, we believe that the market provides a very good 3-5-year opportunity from current levels.

For long term foreign investors who are either ‘underweight’ India or who have not yet invested here, we have been advising a phased entry into Indian equities.

For investors who already have a full exposure, we are not recommending a move to cash at this juncture. Depending on the type of exposure they have, the recommendation could either be to change the mix of this exposure, or to hold on to their positions in India.

Recent reports suggest that India-specific funds have been facing redemption pressure overseas. Is this also Kotak’s experience?
Over the past few months, the outflow of FII money from India, while significant in absolute terms has been quite small — in low single digits — as a percentage of assets held by FIIs in India. In the first quarter of this financial year, we had a small net inflow into our offshore funds.

The premium valuation that Indian stocks enjoyed over other emerging markets has effectively been trimmed. Will Indian valuations remain at a par with other emerging markets or is there scope for improvement?
While it is difficult to predict prospective valuation premium, I would expect that the valuation premium of the Indian market would really depend on the appetite for Indian stocks among domestic and foreign investors relative to other markets.

What progress has been made in the unwinding of PN-routed positions in Indian stocks? Is this also contributing to the decline?
I don’t have data on the precise extent of unwinding of PN (participatory note) positions, but I expect that this should be one of the factors that have contributed to market declines.

I would expect that there has been significant unwinding of proprietary books of global banks, as well as unwinding of normal and leveraged PN positions in the market. These would have played a part in the decline.

A look at the gross purchases made by FIIs and new registrations in the Indian stock market over the past six months show that FIIs continue to invest in India, though equally heavy pullouts are resulting in “net sales”. Do you see a change in the profile of FIIs investing in the Indian markets between 2007 and 2008?
I believe the long-term interest in India is intact. After SEBI eased registration norms for FIIs and came out with its recent notification on third party sub-accounts, there has been significant registration activity both for FIIs and sub-accounts. While some of this is totally new money accessing India for the first time, there is a lot of rerouting of money happening from PNs to direct FII and sub-account investing. We are seeing a number of boutique fund managers setting up funds for India, in addition to which there are regional and global players both in the listed equity and private equity space looking at direct access to Indian equities.

Returns for offshore investors in India have been further trimmed by a depreciating local currency. How do you advise offshore investors to manage this risk? What is your outlook on the Indian currency?
The cost of hedging the rupee has been high, and the mechanism for maintaining a currency hedge in India has been quite inconvenient for FIIs. Given this, it has not been easy for foreign investors to hedge their currency risks effectively.

This was not an important factor while the Indian markets generated significant double digit returns annually and in an environment where the currency was appreciating against the US dollar. However, if the markets continue to under-perform over the longer term and if the currency continues to depreciate, this will become an important factor weighing on investors’ minds.

For the present we are not advising traditional investors to hedge their currency. In the short term the rupee is likely to face pressure if oil prices sustain and due to the slowdown of foreign flows into India. However, a weaker rupee poses challenges in inflation management and the levels really depend on how much the RBI intervenes in the market.

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