Asian effect on India’s FII: What’s in store for 2006!!!

India attracted around $10bn of inflow in the stock market from the foreign equity investors during 2005, higher than $8.5bn brought by them during 2004. But this year was different besides the fact that it has attracted more foreign funds. For the first time Japanese investors have contributed around 35% of the FII inflow as they found India more attractive than their local market. So there was the Japan factor in the current year rise. But of late Nikkei-Japan Stock Market Index had shown a stupendous rally post August 2005, and it is around 50% up from its 52 week low of 10770 (May 2005). Macro economic indicators in Japan have shown improvement after having lull performance for the past 5-6 years. Japan is believed to have come out of deflation, whaich it was experiencing for the past many years. The Japanese market is at 5 years’ high, and if the enthusiasm of the local traders is anything to go by- Japan is set for another good year. Due to the near zero interest rate, investment has starting paying off. The consumption is showing an uptrend and export market is doing pretty well partly due to the weak Yen.

Now with near zero interest rate, the Japanese have no incentive to put money in banks (only to see them depreciating in real terms!!!). Their investment has started paying off. They have also invested in foreign bonds, primarily the US (and along with China have financed its huge trade deficit). This has led to the appreciation of the USD against Yen. And with the rising interest rate scenario in the US the trend is expected to continue for a while (US provide more incentive than the Europe with 4.25% interest rate as compared to Europe’s 2.25%). So the export market is expected to remain robust. As we have also heard the rhetoric of Toyota which is set to overpower GM in the world to become the largest car manufacturer.

So the improving consumption pattern and the robust export market promise to give another boost to the Japanese stock market during 2006. So, the Japanese who were gung ho about the Indian market would come back to their home to benefit from the turnaround. Since this year Japanese have invested around $3.5bn in India, so less of US and European investors have invested in Indian markets this year in absolute terms. These factors can be a danger signal for the Indian market.

Also during 2006, China is schedule to come out with big tickets IPOs in either its local market or Hong Kong. It will lead to chipping in transparency in the Chinese companies to adhere to the stock market regulations. So, the FII who could not participate in the China story would invest in the Chinese IPO (which they were eyeing for years). So, lower fund would come in India as they would divert their emerging market fund to China.

Hence the above factors provide some smoke signals to the euphoria in India.

But wait, of late the Middle East funds like AL-Madina, Noor Capital etc. have started investing in India after the Gulf markets have been trading at a crazy valuations of 25-30x PE multiple. So, who knows Gulf investors would do Japan to the Indian markets…as we can raise no question to their extended pockets since the Gulf economy is expected to have more than $50bn in trade surplus during 2005, due to the rise in oil price.