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S Muralidhar & Aabhas Pandya
Mumbai, June 4: Foreign institutional investors are expected to resume investments as India continues to be a favourite destination for them. With the war clouds over Kargil clearing out, the stock markets are likely to see the resurgence of FII investments. Net FII investments turned positive once again on Thursday with Rs 13.4 crore coming in.
More, Morgan Stanley Dean Witter in its recent global strategy report has said that it is overweight on India. India is one of the few emerging markets to fall in the overweight category of Morgan Stanley. The other three are Brazil, South Africa and Mexico. With Asia's improving fundamentals, investors in the US have made smart gains in the domestic market and put a part of their assets in Asia, including India.
Based on the Morgan Stanley Capital International Index for emerging markets, the Indian market has risen by 30.16 per cent as of June 2, 1999. This is still lower than the 32.28 per cent average for the Emerging Market Asia index. Other emerging marketsin Asia like South Korea (44.43 per cent), Malaysia (56.93 per cent), Indonesia (56.99 per cent) and Thailand (37.47 per cent) have scored much higher gains compared to India.
``Globally, India is fundamentally undervalued and we may see a move to correct that. We should see large amount of FII money coming in coupled with purchases by domestic institutions and indices are expected to record significant gains. Sectors like IT will also move up,'' says Nikhil Khattau, CEO, Sun F&C AMC.
According to market sources, FIIs had begun to increase the incremental allocation to India when the news from the Kargil front hit the bourses. While this forced the FIIs to stay on the sidelines, the market now expects these fresh allocations to flow in. ``Valuations at a number of counters are still attractive and the story of an economic revival is beginning to look real now. Auto, telecom, engneering, refining are some of the sectors FIIs are looking at,'' said a market source.
Morgan Stanley's report on India'seconomy forecasts India's interest rates going down. The backdrop being a low level of inflation and a further easing of the monetary policy by the RBI. The other indication is the falling yields on government securities. As lending rates fall, followed by deposit rates, there is also a possibility of depositors shifting to equities. ``In such a scenario, a bulk of this money will be routed through mutual funds,'' adds a fund manager.
The rising inflation levels in United States and a likelihood of an interest rate hike is not unduly worrying market players. According to a report by Warburg Dillon Read, the last three weeks (till May 28) all equity funds saw a net outflow of US$1.4 billion against an outflow of US$1.3 billion reported in the previous week with the bulk coming from US domestic funds.
The redemption is miniscule when we see the size of the US mutual fund market and is attributed to the fear of a fall in equities in case interest rates go up. ``However, raising interest rates is not an easytask for Fed since it will have global repurcussions,'' said a fund manager. ``US markets are unlikely to come off sharply. Instead, if there is a steady decline in US markets, FIIs will reallocate their investments to Asian markets, with India bound to get a decent chunk,'' he added.
The resumption of FII fund flow to India will be partly driven by liquidity flows to emerging markets and partly due to relatively cheaper valuations. The Morgan Stanley report sees the MSCIEMF (emerging market free index) surpassing its old high of 587 recorded in 1994 and the possibility of trading as high as 700 for the next several years. The report expects the return on equity 10-year average going up to 10 per cent from the current six per cent.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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