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Friday 24 June 2011

Corruption cases ensures that More FII money to Pak than to India this yr
PAKISTAN IS SUPPOSED TO BE A FAILED STATE
WHILE INDIA IS THE MOST CORRUPT COUNTRY IN THE WORLD
Whether Dalal Street likes it or not, India is now the worst-performing market in the world as dark clouds have started cluttering the economic, investment and political horizons. Worried foreign institutional investors (FIIs), who came to India in droves last year, have been pulling out funds with such alacrity this year that even a much smaller — and significantly more volatile and unstable — market like Pakistan has got more foreign inflows in the last six months.
Stock market returns in India were at an abysmal level (– 14.18 per cent) this year. Countries like China (– 3.96 per cent return), Indonesia (+10.27 per cent), South Korea (+8.07 per cent), Russia (+2.58 per cent), Brazil (– 5.93 per cent) and Malaysia (+ 4.42 per cent) have fared better than India. On the other hand, developed markets like the US showed a return of +1.93 per cent; Germany +11.5 per cent; France +11.46 per cent; and the UK – 0.97 per cent, according to Morgan Stanley Barra data.
As per figures of the Securities and Exchange Board of India, FIIs have already pulled out $497 million (including GDRs, primary market, stock markets etc) from India from January to June 22 this year. This has come as a big blow to the market which witnessed an inflow of $29.36 billion in the whole of calendar 2010. FIIs took out Rs 14,387 crore (around $3.2 billion) from the secondary market in 2011, bringing the Sensex down from 21,108 on November 5, 2010 to 17,727.49 on June 23, 2011.
Across the border, Pakistan received a portfolio investment of around $230 million in the last six months. That, too, when the Karachi Stock Exchange, its largest, has a market cap of only $35 billion whereas the Bombay Stock Exchange has a market cap of $1,500 billion.
A host of factors from rising inflation, high interest rates, fall in growth rate and slowdown in investment activity have boosted the bear party on Dalal Street.
“High inflation is a concern for emerging markets in general, and India is also affected by the same. This has led to a tightening stance by the government and a series of rate hikes have led to a slowdown in the economy. Hence, FII activity is subdued and there is better opportunity in debt markets as tighter liquidity has meant that the FIIs get higher interest rates and support to the currency as well,” said Apoorva Shah, Executive Vice President & Fund Manager, DSP BlackRock.
According to Nandip Vaidya, President, Broking, India Infoline, the rise in commodity prices, particularly crude, was bound to impact emerging markets like India more than others. “India’s current account deficit ballooned and coupled with rise in food prices, interest rate tightening over many months, triggered fears of a growth slowdown. Scam revelations added to the woes. It is widely believed that the Budget has under-reported projected expenditure. Corporate earnings are being downgraded and with the investment cycle running below potential, the growth beyond FY12 is also in question.”
Within the emerging markets, India is more vulnerable to higher crude prices due to its reliance on imported crude. “Also, India faced a negative environment due to the 2G and other scams. This has had its repercussions on the business environment and sentiment and created substantial uncertainty on the policy front. These factors have made India underperform the other BRIC markets,” Shah said.
Investors have rushed to safe havens like gold and silver. Fixed deposits and Fixed Monthly Plans of mutual funds, where 10 per cent returns can be expected, are also in demand. “In any case, after a whopping $30-billion inflow in the last year, it is not unusual for FII flows to moderate in the year that follows. However, given the 10 per cent odd correction in equities and may be some more expected, we believe buying will resume at lower levels,” Vaidya said.
The latest worry of FIIs is the possibility of tightening in rules governing the tax treaty with Mauritius. If both the governments tighten the regulations governing the treaty, the fund flow through this route will come down drastically. “Funds using this route will go elsewhere. India has got minuscule funds FIIs this year,” said a fund manager with a foreign investment firm.
A large chunk of FII investment in the stock market comes through Mauritius as companies registered there are exempted from tax in India under the treaty. The government had recently indicated about reviewing this tax treaty to tighten registration norms and making the fund flows more transparent.
CHART:
Stock Market Returns since Jan 1, 2011
COUNTRY RETURNS IN %  INDIA -14.18
CHINA -3.96     INDONESIA +10.27
S KOREA +8.07     MALAYSIA + 4.42
TAIWAN -4.87   THAILAND -4.65
BRAZIL -5.93 RUSSIA +2.58
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USA +1.93  UK -0.97  GERMANY +11.50  FRANCE +11.46

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