India-focused offshore funds and exchange traded funds witnessed a reversal of fortunes in the second quarter of financial year 2016-17 after four consecutive quarters of outflows. But the cheer may be short-lived as hardening U.S. bond yields prompt foreign portfolio investors to pull money out of India, according to mutual fund research firm Morningstar.
Foreign investors had pumped in net inflows worth $10.16 billion in the first two quarters of the financial year. The trend reversed in October which saw an outflow of $6.4 million. This was followed by heavy selling in November when foreign investors pulled out $2.03 billion from India.
Most likely, the recent outflows from FPIs and fall in the markets will have an adverse impact on the flows into India-focused offshore funds and ETFs as well as their asset base.Himanshu Srivastava, Senior Analyst and Manager-Research, Morningstar Investment Adviser India
The November data of India-focused offshore funds and ETFs been released yet. However, as of October the assets of the these funds stood at a five-quarter high of $44.8 billion compared to $40.1 billion in March. These funds constituted almost 20 percent of the total offshore funds assets in India equity markets at the end of the second quarter, Morningstar said.
Inflows Back For India-Focused Offshore Funds and ETFs
India-focused offshore funds and ETFs saw net inflows of $196 million in the second quarter of the current year, according to Morningstar's Offshore Spy report. In contrast, the previous quarter had seen a net outflow of $826 million.
In fact, since September 2015, India-focused offshore funds and ETFs have seen cumulative outflows worth $5.2 billion, the report said. Inflows into these funds finally returned in the July-September quarter.
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India-focused offshore funds and ETFs registered a growth of 8 percent during the quarter compared to a growth of 5.1 percent in the previous quarter.
Positive environment in the domestic markets kept sentiments in the Indian stock markets upbeat, leading almost all the major domestic stock market indexes ending the quarter in green.Morningstar Offshore Spy Report
The oil and gas sector was the top performer in the quarter, benefiting from improved gross refining margins and "attractive valuations" of key companies, the report added. Technology and capital goods were hurt most due to macroeconomic uncertainties and lack of pick-up in investment demand respectively.
Surge In Assets Of Regionally Diversified Equity Funds And ETFs
Assets held by foreign funds, which have a partial allocation to Indian equities, also rose to $4.98 trillion at the end of the September quarter, the report stated. This was higher than the figure of $4.42 trillion at the end of the June quarter.
These funds constitute about 80 percent of the total offshore funds assets in Indian equities as of September 2016. They've been classified as Asia/Asia-Pacific funds, Emerging markets funds and global funds.
The allocation, or value of investment, to Indian equities by these funds also moved up for the second consecutive quarter to $177.8 billion in September, higher than $163.2 billion recorded in the previous quarter.
Given these funds have substantial exposure into Indian equities, a small increase or decrease in their India weightings or inflows/outflows can trigger substantial inflows/outflows from Indian equities.Morningstar Offshore Spy Report
Exposure, or allocation in percentage terms, fell for regionally diversified equity funds and ETFs. Investments by Asia/Asia-Pacific funds declined 60 basis points to 12 percent of their assets during the second quarter. Emerging markets decreased their exposure to 10.9 percent from 11.2 percent sequentially, while exposure in global funds fell to 2 percent from 2.2 percent in the previous quarter.
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