India-dedicated funds see strong outflows in Q1

Foreign investors were cautious about investing in India in particular and emerging markets in general in the first quarter. Global funds, tracked by EPFR Global, that invest in India recorded outflows of $870 million between January and March this year.

The fund flow recorded by EPFR is at odds with the data put out by the stock market regulator SEBI. The 1,710 FIIs registered to do business in India, which include equity funds, hedge funds, banks and insurance companies, pumped $3.7 billion into the equity market in the first quarter. While the difference could partly be attributed to the limited set of funds tracked by EPFR Global, it does raise a question on the nature of the fund flows into equities, since many of these FIIs are domiciled in tax havens.

Indian equity markets also receive funds through allocations in global emerging market (GEM) funds, Asia ex-Japan and BRIC funds. All these funds have witnessed an ugly start to 2014.

Emerging market funds registered over $41 billion of outflows in the first quarter, a sharp reversal from the inflow of $29 billion in the same period last year.

GEM funds suffered the biggest outflows, amounting to $20.3 billion, followed by Asia ex-Japan equity funds, which saw net withdrawals of $15.5 billion. With respect to other categories of EM equity funds — targeted at Latin America and Europe, West Asia and Africa — they suffered net outflows of $3.5 billion and $1.7 billion, respectively, during the period under review.

The key factors that battered emerging market equity funds were the start to the wind-down of the Federal Reserve’s quantitative easing programme, a crowded electoral calendar, mixed economic data from China and the events in Ukraine. As of April, retail investors have redeemed money from this fund group for 52 weeks in a row.

The data suggests that investors are now adopting a country-by-country approach to emerging markets, as a result of which most EM themes struggled in the first quarter.

Dedicated BRIC (Brazil, Russia, India and China) equity funds extended an outflow streak that stretches back to the fourth quarter of 2012, as investors pulled out $828 million in the first three months of 2014, while MIST (Mexico, Indonesia, South Korea and Turkey) saw nearly all of last year’s inflows evaporate. Frontier markets were the only exception, with funds dedicated to countries such as Vietnam, Nigeria and Argentina continuing to attract fresh money.

In contrast, developed market funds saw strong inflows from equity funds in April-March 2014, with the US attracting $26.2 billion, Japan raking in $8.7 billion and Western Europe pulling in $31.5 billion.

The trend in EM equity funds could change dramatically in the second quarter, with most funds making a modest start to reversing the outflows in the final days of March, according to EPFR Global.

In this respect, EPFR Global noted that India equity funds, in particular, began to rebound as investors responded to better inflation and current account deficit data and hopes raised of an investor-friendly Government coming to power in the aftermath of the general elections.