Indian Markets: A Tale of Many Numbers

By Ajit Dayal

Money flows are doing to stock markets what money flows are supposed to do. When people buy with greed, markets rise. When people sell in fear, markets fall.

Table 1: Foreign flows stayed positive in July

Period	Net Foreign Activity(US$m)	Net Local Fund Activity(US$m)	Total (US$m)	Change in BSE-30 TRI in that period (%) (USD)
CY 2003	6,940	93	7,033	+86.3%
CY 2004	8,958	-261	8,697	+23.1%
CY 2005	10,896	3,089	13,985	+42.2%
CY 2006	7,994	3,442	11,435	+53.3%
CY 2007	17,235	3,121	20,357	+68.5%
CY 2008	-13,136	2,037	-11,099	-60.7%
Cumulative	38,888	11,520	50,407	+231.1%
July 2009	2,283.8	376.7	+2,660.5	+7.8%
YTD 2009	+7,310	+878	+8,188	+64.4%

Source: Sebi.gov.in

Egged on by these foreign inflows of USD 2.2 billion from FIIs (much of it short term money and some of it long term capital) and buy orders from local funds, the Indian stock markets gained ground in July (+7.8% in US dollars). So far, the Indian stock markets have gained +64.4% in the year-to-date (YTD) through July 31st. Not bad for a 7-month return.

Though the Indian stock markets underperformed the MSCI Emerging Markets Index in July (see Table 2 below), they are ahead for the 7 months of this year.

Table 2: India trails Emerging Market Index in July, but still ahead for the year.

(all return figures in USD)	1-month for July	YTD 2009	CY 2008	CY 2007
BSE - 30 TR Index	+7.8%	+64.4%	-60.7%	+68.5%
MSCI Emerging Market Index	+11.3%	+51.1%	-53.5%	+39.5%

MSCI Return number as per Bloomberg; * Annualized Numbers

And how does India compare with its larger peers within the emerging markets: Brazil, Russia, and China?

Well, based on the MSCI BRIC Index (see Graph 1 below), India managed to outperform only Russia.

Graph 1: India lags MSCI Emerging Markets and MSCI BRIC in July (all in USD) Source: Bloomberg

A good year - but can it end badly?

But this is no time to calibrate where individual markets and asset classes are. While many went on their annual vacation in the western world - with anxious Blackberry a quick touch away - the markets gave everyone a warm fuzzy feeling.

This is the first time in calendar year 2009 that all the Indices and asset classes tracked in Table 3 below have a plus sign ahead of them.

Table 3: All in positive territory YTD, but India lags Brazil and China

(all in USD)	% change for month ended July, 2009	% change YTD in CY 2009	% Gain/Loss since July 31, 2007 (Bear Stearns funds in trouble)
India - BSE-30 TRI	+7.8%	+64.4%	-12.8%
Brazil - Bovespa	+11.8%	+82.4%	+0.8%
China - SHCOMP	+15.5%	+89.6%	-13.1%
Russia - RTSI$	+3.1%	+63.6%	-47.8%
MSCI EM Free	+11.3%	+51.1%	-20.7%
S&P 500	+7.6%	+11.0%	-28.8%
MSCI World	+8.8%	+19.0%	-28.5%
Berkshire Hathaway	+7.8%	+0.4%	-11.8%
Gold	+3.0%	+8.2%	+43.6%
Oil	-0.6%	+55.7%	-11.2%

Source: Bloomberg

This table has a lot of information in it, so spend some time on it.

India is lagging Brazil and China in terms of returns in July and also for the year-to-date.

But, since the world began to re-price and reassess risks (the extreme right column), India (-12.8%) has lagged Brazil (mostly due to currency movements - the Brazilian real has gained ground against the US dollar) and is a whisker ahead of China (-13.1%) and has done way better than Russia (-47.8%).

Note that Gold is up +43.6% over the same time period. It should remain an essential part of any investment portfolio.

In August 2007, two hedge funds belonging to Bear Stearns - a well established finance company - blew up. This was the first flapping of the wings of the butterfly. Eventually, Bear Stearns went bankrupt as did Lehman Brothers in September 2008. But August 2007 was when some fears over the extent of unknown risks taken to get unknown returns began to seep into the minds of global investors.

While China and Brazil have - so far this year - benefited more than India from the perceived global economic recovery (in terms of share price movements) any change in perception could see a faster decline in those stock markets. But India is still hostage to foreign short term flows of speculative money and there is no doubt that the Indian markets will be hit by "FII selling".

And India has its own set of problems: from the drought to a questionable policy making process.

So, while swine flu dominates the press, the China cold could be more of an irritant. Maybe it is time for some Indian academic to write a report on why China - broken up into 25 independent countries - would be less dangerous for our portfolio returns.

Till then, keep with the asset allocation; don't panic when others do; and let's keep praying for some rain.

Comments

[Teak:]

Help me understand one thing from your numbers:
YTD 2009
Net Foreign Activity(US$m) = +7,310
Net Local Fund Activity(US$m) = +878

Does this mean that foreign investment in India's market exceeds local investment by a factor of 9?? Or is it only the change in investment for 2009 (year-to-date) that is different by 9x??

Thanks.

Aug 18 11:36 PM

[himlynx:]

It is only the change in investment for 2009 (year-to-date) that is different by 9x.
That said, foreign fund activity has a major influence on the Indian equity markets

Aug 19 11:54 PM