HSBC Holdings Plc., in a report dated 12 September and titled The World’s Last Bulls, marvels at the fact that bulls, an endangered species elsewhere, are still to be found in plenty in India.
Writes HSBC strategist Gary Evans, “We were shocked, then, to find in meeting fund managers in India this week that perhaps two-thirds are outright bullish, some extremely so, and many are puzzled as to why the Indian market has fallen at all this year and why foreigners have been net sellers.” Why the bullishness? The fall in the price of oil and commodities is just one factor. Other reasons, says the report, include new net inflows into equity funds, lower government bond yields, inflation close to peaking, strong corporate balance sheets and gross domestic product growth of around 7%, much higher than in most parts of the world. The problem, as the report points out, is that the Reserve Bank of India’s tightening efforts will slow the economy with a lag. That should lower earnings growth of companies.
More importantly, according to fund tracker EPFR Global, “So far this year, investors have removed a net $28.6 billion (Rs1.32 trillion) from emerging markets equity funds, the equivalent of some 5% of the assets those funds managed at the beginning of 2008, compared to net inflows of $10.7 billion at the same point last year.” The HSBC report says foreign investors have pulled out of India since the start of this year only 13% of the money they put in during the 2003-07 bull market, much less than they have withdrawn from other markets (for example, 19% in Taiwan, 64% in Thailand and 31% in Hong Kong and China).
The implication: since India is still relatively unaffected, any distress selling by foreign investors reacting to events in the financial sector in the West could lead to more selling in the Indian markets.