Brokerage house Macquarie Capital Securities said on Monday that global investors who have invested in India will likely move their funds to other Asian markets such as Korea and Taiwan this calendar year.
“The risk is more this year that India will be used as a funding source for other Asian markets, but India could receive marginal net FII inflows. Moreover, 2011 will also see a shift of funds from fixed income into equities,” said Mr Michael Kurtz, Head of Strategy-Asia, Macquarie Securities Group, at a news conference.
FIIs are pulling out money from India due to concerns over inflation and potential political instability that could be caused by alliance partners facing state elections. FIIs are likely to direct such funds elsewhere in Asia for higher returns, said Macquarie.
Moreover, six key Asian markets of Taiwan, Korea, India, Indonesia, Thailand and the Philippines may also see a drop in foreign investments by more than half this year to $20-25 billion from the $64 billion inflows of 2010.
Besides rising inflation, high interest rates, objections raised by the Environment Ministry and lack of reforms in land acquisition in India are other bottlenecks that may lead to a slowdown of foreign investments and lower corporate earnings, said Macquarie.
‘Valuations stretched'
“The FII investment cycle could be pushed back by 6-9 months, after which FII inflows are expected (post-market-consolidation). Valuations in 2010 had already been stretched,” said Mr Rakesh Arora, Managing Director and Head of Research, Macquarie Capital Securities India.
“Uncertainty on corruption is the bigger challenge over inflation for investors because inflation can be factored in while corruption cannot be. One may not know when a company could be pulled up on corruption charges.”
Mr Kurtz said that the US recovery may also not be a big threat for the Asian markets as perceived.
“As bond yields go up and there is a sell off, we think more money will go into equity. There will be no zero-sum outflow from Asian markets, but there will be growth in the overall money supply because the Fed is committed to pump in more money.
“The global financial liquidity will stay in place, though the dollar may weaken against Asian currencies,” he said.