May 31, 1999
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KAUTILYA FIIs on Fast Forward Emerging markets are no longer submerging markets. By Jairam Ramesh Stock markets everywhere have their own peculiar logic and momentum. If proof were needed for this, just consider what has been happening to the Bombay Stock Exchange's Sensex, the most widely quoted index of bourse activity in this country. On April 26, the day the government fell, the Sensex stood at 3,245. As Kautilya writes on May 20, the Sensex is at 4,124, an increase of a whopping 879 points in just about three weeks. This boom is among the sharpest in recent times and is dwarfed in its magnitude only by the spurt in stock values in February-March 1992, when Harshad Mehta was running riot. What gives the current boom special status, however, are two factors. First, it is broad-based and not confined to the usual suspects of a few Group A scrips. Second, it is fuelled almost entirely by the much-reviled foreign institutional investors (FIIs). Between April and December 1998, these FIIs took out $634 million from the country, the first time there was an outflow since our stock markets were opened to foreign investment in 1992-93. But between January and May 1999, $683 million has been brought in, of which $225 million was in April and $355 million between May 1-19. Total cumulative investment by the FIIs now stands at $9.5 billion, about 8 per cent of market capitalisation. The bulk of this is controlled by big names like Morgan Stanley, Capital, Jardine Fleming, Fidelity and Templeton. It is intriguing that at a time when economic growth is still in the doldrums and when there is a policy vacuum, the sentiment on India has suddenly turned positive. It is possible that the absence of a government has perversely helped because then there is no chance of springing negative surprises on the market. Could it be that the FIIs are seeing a recovery that we, caught in the trap of politics, are missing? Could it be that the FIIs are discounting political uncertainty and are betting on reforms continuing, whatever the complexion of the government later this year? The most immediate provocation for the FIIs' return to India is simply that they have more money to invest because the US economy is continuing to perform strongly and the New York stock market is moving up dizzily. Moreover, over the past few months east Asian economies have also shown signs of recovery. The sentiment, as important as fundamentals, is positive. This is most evident in South Korea, which may post a modest 4 per cent GDP growth this year as compared to a negative 6 per cent the previous year. East Asia is once again showing current account surpluses. Interest rates are down to pre-crisis levels. Forex reserve levels have increased substantially. Currencies have stabilised. Countries like Thailand, Malaysia and South Korea are also in the midst of structural reforms that are earning plaudits from foreign investors. There are very faint signs of recovery in Japan and Brazilian and Russian equities have also performed well in the first quarter of this year. It is this rebound after the disaster of 1998, coupled with the boom in the US, that is leading FIIs to bring back investments into Asia, particularly to commodity-related stocks. India has a 7-8 per cent weight in many funds investing in Asia (minus Japan). Thus, we are experiencing a "spillover effect". It also helps that stock-market valuations of many of our companies are still modest when viewed in an Asian context. Many Indian companies are a good buy when seen for their intrinsic strengths and that is what is happening now that the country-story is on the backburner and investors are forced to focus on both the sector and company-stories. In addition, the outstanding success of our securities depository in spreading the culture of paperless transactions is expanding the investment universe. Consolidation of the depository is the key to sustaining greater FII inflows. Most top FII managers, like Yashwant Sinha's daughter-in-law, are very bright youngsters of Indian origin. Clearly, emotion may well be part of investment decision-making. But our own attitudes remain ambivalent. There is a general impression that FII money is "hot", short-term money that will flow out of the country at the first sign of trouble. True, there is a herd instinct but broad-based FIIs of the type who are in India are medium to long-term investors. Their presence is also a guarantee that governments will follow sensible economic policies since there is always the fear that FII money will flow out. FIIs are also adding substantial value. Their regular research reports on both Indian companies and on various aspects of the economy are unmatched in data, detail and analysis. They are slowly bringing new standards of corporate governance and disclosures in the Indian corporate sector. But it is essential that countervailing power to the FIIs through domestic institutions be also developed through, for example, UTI, LIC and other mutual funds. More importantly, retail investors must return. A recent Jardine Fleming research report suggests there is evidence that retail activity is unmistakably picking up in the equity market. This is reflected, for instance, in the rise in the number of shares traded per day, the decline in the average number of shares per trade, the increase in the activity in stocks with small capitalisation and the increase in domestic mutual-fund collections. The author is secretary of the AICC's
Economic Affairs Department. |
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