Are the FIIs making a mass exit?

Mon, 15 Feb Pre-Open

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They pumped in a whopping US$ 17 bn in the Indian stock markets in 2009. They were also to a great extent responsible for more than US$ 250 bn surge in the market cap of Sensex companies. However, 2010 has been a different story altogether. As per a leading daily, FIIs, amongst the most influential set of investors in Indian equities have collectively pulled out US$ 2.7 bn from the Indian stock markets over the past 18 trading sessions. However, it is not just India that has been at the receiving end. As per Bloomberg, investors have pulled out the most money from emerging market equity funds in 19 months as fresh troubles have begun to emerge in the form of Greece debt and US monetary policy exit.

The turn of events must certainly be worrying for an Indian investor. After all, the last time FIIs headed for the exit doors, the Sensex had witnessed a sickening loss and had led to huge wealth destruction. However, we are of the view that FII investments mostly suffer from what we feel is an investing myopia. In other words, their fascination for short term returns has opened up fantastic opportunities for investors willing to remain patient and wanting to invest for the long-term. Thus, any such panic selling by the FIIs should be looked upon as an opportunity to get into what certainly is one of the most attractive growth stories from a long term perspective. As has been proved time and again, FIIs keep coming back to India and that too in ever increasing numbers and we see no reason why it should be different this time around as well.

Will China swallow the bitter pill?
China is finally taking steps to slowdown its overheating economy. Just recently, it raised interest rates and later also asked banks to keep aside higher reserves. But that may not be all. Some experts like the renowned Goldman Sachs economist Jim O’ Neill believe that something else could also be brewing. O’Neill is of the opinion that China could also undertake currency revaluation. "I have a strong opinion that they’re close to moving the exchange rate", the economist is believed to have told Bloomberg.

Besides slowing down inflation by making imports cheaper, the appreciation in Chinese Yuan is also likely to ease tensions between China and countries like US who've been accusing the dragon nation of deliberately keeping Yuan undervalued and helping inflate asset bubbles. What more, an artificially undervalued Yuan also works to the detriment of other exporting nations as it makes their exports less competitive than China. Thus, the other nations would also heave a sigh of relief if China does undertake some sort of appreciation in its currency.

Having come to terms with the harsh reality of a export driven growth model, China now needs to increase its dependence on domestic consumption and hence, a stronger Yuan could also help lower prices of goods and encourage greater consumption by the Chinese consumer.