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Thursday, September 17, 2015

CapitalStars - Fed rate call: If ETFs sell, will Indian market survive meltdown?

CAPITALSTARS - Equity Market Trading Tips

NEW DELHI: Selling by exchange-traded Funds (ETFs), which accounted for more than one-third of the total amount pulled out from Indian equities in August-September, is likely to intensify if the US Federal Reserve decides to hike rates in its two-day policy meet starting Wednesday or global economy shows signs of slowdown.

Exchange traded funds (ETFs) withdrew $1.17 billion or Rs 7,641 crore from Indian equities between beginning of August and first week of September, ET said in a report quoting data from Bloomberg.

This is the second highest amount withdrawn by the ETFs invested in the emerging markets after China. Funds pulled out from the Indian equities accounted for nearly 20 per cent of the total stocks sold in EMs as illustrated in the accompanying chart.

"Foreign portfolio investors (FPIs) have sold $3.1 billion worth of Indian stocks over August and the first week of September. This means ETFs selling is accounted for more than one-third of the total amount pulled out from Indian equities,," said the report.

The surprise devaluation of the Chinese yuan on August 11 sparked a global selloff in equities, commodities and currencies. Indian markets witnessed a huge flash selling since August primarily from ETF funds and hedge funds which are yet to meaningfully cover their portfolio losses.

"Looking at the kind of redemption numbers which are coming from the emerging markets (EMs) and the ETF funds is going to obviously affect India in the very short term," says BP Singh, Pramerica Mutual Fund,in an interview with ET Now. 

"A rough estimate is, so far, $3 billion worth of redemption is taking place in India which is likely to carry on for some more time. So, one will have to just wait for this redemption to taper off before one starts buying," he added. 

"The downgrade of Brazil last week added fuel to the fire. So, for some more days, we can expect little bit more redemption from the global funds particularly on the Indian markets," concludes Singh. 

The appetite to own risky assets such as emerging market equities (EMs) is drying up among global fund managers as the prospect of a rate hike in the US is making them risk-averse, ET said in a report quoting experts.

UR Bhat, Managing Director at Dalton Capital, in an ET report, said that "ETFs enter emerging markets based on the macro call taken. ETFs being sector-agnostic are the first to wind down their exposure whenever they find a threat to the broad call. This is why ETFs are trimming their exposure to Indian market." 

Is it all that bad for Indian investors? 

Experts are of the view that ETFs are driven partly by their redemption pressures, but India's macros are relatively better than most of the other emerging markets. So, any dips should be used to add stocks to the portfolio. 

India as a country will benefit out of low commodity prices. The inflation has come down, better-than expected industrial production, and over 7 per cent GDP growth in 2016 make India a better investment destination. If there are outflows, then it will be temporary and the flows will come back to India once redemption pressure subsides. But, till that, there could be some more pressure from ETF selling. 

The risk that we face, investors should be very clear there can be a risk of emerging markets selloff, which has got nothing to do with India, say experts.

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