IS MONEY COMING TO EMERGING MARKETS?

By Ruma Dubey

The US and UK markets ended pretty badly on Friday and though the weekend, Indian traders had expected the markets here to perform equally, if not more badly. But being unpredictable as it always is, the Indian bourses decided to shrug off the phoren overhang for and allowed performance of Q2 earnings of stocks to decide the course. And with TCS, HDFC and LT reporting good numbers, the markets are surprisingly doing well today.

So who is investing? Long term traders are cherry picking and going for quality stocks, ruled by strong fundamentals. Traders continue to come and go but it’s based on individual stock performances. But it is the FIIs who continue with this affair with India, with the infatuation seeming to be intact. They have invested Rs.11,000 crore in the stock market  and this is between 1st Oct to 19th Oct. The total FII investment in 2012 till date stands at a jaw dropping Rs.93,444 crore.

The perception is that the FIIs are enthused with the rhetorics of the Govt though don’t they also know that all the reforms announced first needs to get passed by the Parliament? Given the track record of the monsoon session and the few previous ones, little gets done and this time too, though the Govt wants to push ahead with reforms, the Opposition with its walkouts might not allow much to happen. Thus to say that FIIs are pumping in money because the Govt has woken up is wrong; it is just one of the reasons.

The big reason is QE3 or the third round of Quantitative Easing (QE) initiated by the US Fed Reserve in Sept’12. Like QE1 and QE2, this third round of QE is also about stimulating the US economy and in short means, the US Govt printed more dollars to buy up assets like long-term Treasuries or mortgage-backed securities from commercial banks and other institutions. This will reduce long term interest rates further and hopefully, spur people to spend more and bring down the recessionary trends. The jury is still out whether or not such QEs work but QE1 helped contain the recession, so to that extent it worked; research is till on whether or not QE2 worked and now we have QE3 too.

But thanks to the QE3, there is a lot of money moving to emerging markets like India, Korea, Indonesia, China, Argentina. There are investors on Wall Street who feel that emerging markets are set for a good run, much better than US markets. The stimulus by Fed has already inflated the value of stocks in USA while the MSCI Emerging Markets index, which trcks stocks in 21 countries is 25% lower than its Oct 2007 highs.  With European Central Bank President Mario Draghi also stating that he will do everything possible to keep the Euro zone intact, risk aversion amongst global investors has come down and despite these emerging markets being volatile, investors today seem to have the appetite. When Asia turned risky in 2010, investors sold scooted away and diverted money back to USA. And now, looks like it is coming back to India and other markets again.

According to EPFR Global, till date, global investors have poured a net $23 billion into emerging-market stock funds of which $9 billion came in from beginning of August. On the other hand, they have pulled out a net $7.1 billion from U.S. equity funds this year of which over $3.50 billion was since the beginning of August.

But money coming to these markets is like quick silver; the moment they see trouble, the money will vanish as quickly as it came in. Concerns about Govt policies and political stability remains. Many fund managers in US still remain wary and feel that US stocks are more stable, as companies are more sound and have lower debts than Asian companies.

Despite this, for now, emerging markets are where big money is headed. This is reiterated further by Morgan Stanley’s theory – TINA or There Is No Alternative. It expects Indian markets to do well in 2013 as in its report, it states that India is more attractive relative to others while USA and Europe remains in doldrums. It expects money to come to India because the other options do not seem attractive enough. It states that India offers good opportunities in terms of diversification and stock picking because it believes its corporate fundamentals seem more “stable”.

Well, whether it is TINA or QE3, these reports indicate that things could turn for the better in India. And in these times, like the drowning man clutching to the last straw, any theory, as long as it reiterates optimism, is worth pursuing.