December 2015: Domestic investors step in, where FIIs fear to tread

The Nifty was flat for the month and is down 6.4% in this financial year. Our portfolios have done fairly well relative to the market and are moderately positive for the year. The big event of the Fed rate hike came and went and the global markets took the event in their stride. Often the pre-event fears are belied when the actual event unfolds.

Concerns about the Fed rate increase and the consequent impact on emerging market currencies, has led to outflow of foreign capital from emerging markets. In the current fiscal, FIIs pulled out $ 2.3 billion, and about $ 4.2 billion since 1 May 2015. Over the last 10 years, there has been only one financial year (FY2009) when FIIs have withdrawn money from India, though admittedly 3 months still remain in this financial year. FIIs have invested roughly $15bn annually in India over the last 10 years and they have been steady investors into the Indian market – so, an outflow over a 9 month period is also a bit out of the ordinary. Also, though the Rupee has weakened about 5% in 2015, the fall has not been of any significance compared to the currency weakness in countries like Brazil, South Africa, Australia, Indonesia or Russia. On the whole, the Indian markets (both equity and currency) held up quite well in the backdrop of FII outflows and weakness in other emerging market currencies.

Even as FIIs who were the steadiest source of inflows into Indian equities over the last decade, were withdrawing money from India, strong domestic inflow into equity mutual funds has more than made up as domestic investors have invested about $1bn per month in this financial year. The cool down in the prices of gold and real estate may be contributing to these strong inflows. With inflation down, and demographic tail winds yet to kick in, the Indian economy continues to hold significant promise for investors in the coming years. It is nearly certain that India will be among the fastest growers among large nations, over the next decade. On the other hand, the current log jam in various aspects of the economy makes one wonder how and when the change would happen. Weak commodity prices, large NPAs for banks, significant delays in infrastructure projects and serious balance sheet risks for several companies, are some of the large problems that need to be addressed. Shareholders of many of these companies will be compromised, as the system tries to resolve these issues.

Although the immediate term problems look large, we remain optimistic over the next few years. One clearly needs to be careful not to get caught up with companies with broken down balance sheets. Accounting in some situations also does not seem reliable. As long as one can navigate the ‘mine field’ safely, it should be a fairly satisfactory road ahead. We remain committed to our preferred space of ‘safe’, high quality companies, and are able to see some good opportunities emerge in the face of an almost 16 month long flat market.