HONG
KONG (Reuters) – Southeast Asian
nations are swallowing an outflow of money from India, as foreign investors
lose patience with its policy paralysis and slowing growth and aim instead for
more promising emerging markets such as Indonesia.
Corruption
scandals and high inflation have added to India’s woes, which have seen growth
slow to a three-year low while the fiscal deficit widened to 5.9 percent of GDP
in the last financial year.
“India
was sold on the promise of high growth which simply hasn’t panned out over the
past four years,” said Gautam Prakash, founder of U.S. based hedge fund Monsoon
Capital.
Foreign
investors pulled a net $540 million out from India in March and April, compared
with $13 billion in inflows in January-February.
Foreign
portfolio flows into Indian stocks have dropped 99 percent to just 5.17 billion
rupees since a March budget that largely disappointed investors, compared with
427.36 billion rupees in 2012 before the budget.
Among
the most significant developments from the shift has been the direction in
which money is headed – with a big chunk flowing to Jakarta and other Southeast
Asian capitals.
>>
India & SE Asia funds’ assets: r.reuters.com/syr28s
>>
Valuation: India vs Southeast Asia r.reuters.com/tyr28s
Two
provisions put forward in the budget to tax indirect investments and combat tax
evasion were the last straw for some global mutual funds, prompting an
acceleration of money leaving India.
While
the provisions were later put on ice, the prospect that such a tax could be
proposed in India was enough for some investors to send their Asia-allocated money
further east.
“You’re
seeing a situation where the ‘I’ in BRIC is being replaced by Indonesia,” said
Tim Condon, head of research and strategy for Asia at ING.
LEFT OUT
An
emerging market brochure distributed by Franklin Templeton last month had data
on India missing from a world map. From a global leader in emerging market
investing, led by omnipresent guru Mark Mobius, that omission was telling.
India
exposure in Asia’s biggest equity fund, the $18 billion Templeton Asian Growth
fund, dropped to 16 percent of its assets at the end of March from nearly 20
percent a year ago, while exposure to Association of Southeast Asian Nations
countries rose to 35 percent from 31 percent during the period.
An
ASEAN-focused equity fund launched by Daiwa Asset Management started with about
$366 million in February and has since grown to manage about $430 million,
while Fidelity Funds-ASEAN has seen a net inflow of nearly $250 million in the
last year.
The
bigger ASEAN markets do not necessarily offer a compelling case on valuation
grounds.
“Generally
we are more negative on India than we are positive on the alternatives, such as
Indonesia and the Philippines where we feel the markets have perhaps run ahead
of themselves,” said David Baran, co-founder of Tokyo-based hedge fund Symphony
Financial Partners.
“However,
the ASEAN alternatives do have more positives and less negatives than India and
we think that foreign investment outflows from India into the ASEAN
alternatives are highly likely to increase if anything.”
Indian
shares trade at price to book value of 1.9 times, higher than 1.4 times for
Asia Pacific shares as a whole but less than 3.1 times for Indonesia, 2.2 times
for Thailand and 2.5 times for Philippines, according to data from Thomson
Reuters StarMine.
The
trend, nonetheless, is clear as money managers shift away from India, at least
for the short-term, towards markets that offer the same favourable demographics
and growth potential that had previously drawn investors to Delhi and Mumbai.
BETTING ON ASEAN
Funds
from firms such as Aberdeen, Matthews and T.Rowe with mandates to bet in Asia
invested a smaller percentage of their assets in India at the end of March
compared with the year-ago period and more in Indonesia and other Southeast
Asian countries than they did a year ago.
Part of
the drop is due to a fall in the value of holdings, but fund flow data tracked
by Lipper shows mutual fund clients are responding as well, giving more
ammunition to funds betting on Southeast Asia and less to those investing in
India.
Investors
pulled out nearly $480 million from offshore India dedicated funds in April,
increasing the 12-month cumulative net outflows to about $4.1 billion,
according to data from Lipper.
By
comparison, funds investing in Southeast Asia have seen net inflows of about
$900 million in the year ending April.
The gap
between the total assets under offshore India funds and that of Southeast Asia
fell to a three-year low of about $13.5 billion in April, indicating investors
were buying into a region that is home to nearly 600 million people.
Indonesia
focused bond funds are in favour too, with eight such funds collecting a
cumulative $355 million in the year ending April. HSBC Indonesia Bond Open
received $200 million alone.
“We are
definitely seeing more interest in ASEAN,” said Matt Pecot, head of Credit
Suisse’s prime broking unit in the Asia Pacific.
Net
exposure to India in Asia-focused hedge fund portfolios fell to 18.7 percent in
April from 32.5 percent in January 2011, according to data compiled by Credit
Suisse based on their client portfolios. The same measure for Indonesia surged
to 51.8 percent in April from 24.7 percent in January 2011.
Net
exposure refers to the difference between a hedge fund’s long positions and
short positions. A higher net exposure means funds are expecting the stock
market to rise.
BRIC HITS WALL
Ten
years ago, Chairman of Goldman Sachs Asset Management Jim O’Neill, then the
bank’s chief economist, combined the emerging market growth stories of Brazil,
Russia, India and China to coin the famous “BRIC” moniker. O’Neill recently
called India the “biggest disappointment” of the BRIC nations.
“India
was a 9 to 10 percent growth economy when the BRICs were put together and now
it’s slowing. Indonesia was a 4 to 5 percent growth economy and it’s moving in
the other direction,” ING’s Condon said.
The
top-three BRIC mutual funds by assets invested a smaller percentage of their
assets into India at the end of March than they did a year back, according to
data from Lipper. They are also underweight compared with their benchmark,
meaning they do not expect India to contribute to portfolio outperformance.
Templeton
BRIC fund had 11.7 percent of its assets in India, its lowest since June 2009.
“India
is getting trapped in that high fiscal deficit, high current account deficit
situation and there is no easy way out of that unless it takes the tough
steps,” said Binay Chandgothia, portfolio manager at Principal Global
Investors.
Indonesia
and the Philippines, meanwhile, have neither current account nor significant
budget deficits to worry about, although they do share some of India’s problems
such as their own fuel and food subsidies, Symphony Financial Partners’ Baran
said.
With
combined GDP of $2 trillion, 10-member ASEAN is angling for foreign investment.
Ranging from resource-rich Indonesia to impoverished Laos and financial centre
Singapore, ASEAN is planning a union by 2015 to allow for free flow of goods,
capital, services and labour.
“As far
as stock prices go, foreigners own approximately 40 percent of the free float
of the Indian market,” Baran said.
“It
will not take much of an exodus for this to have a significant impact on the
market and there are clearly plenty of alternatives in ASEAN.”
(Additional
reporting by Abhishek Vishnoi in MUMBAI; Editing by Michael Flaherty and Alex
Richardson)
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