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See equity inflows at $25 bn plus this year: Quant

FII flows into India hit a seven-month low in September. But the question is will flows continue to be under pressure on US Federal Reserve rate hike jitters? Cameron Brandt, Director of Research, EPFR Global believes investors are perhaps edging more towards a risk-off mind set.

He says institutional investors will probably deploy the money piling up in money market funds once they get some certainty about the number of issues. But fund managers continue to talk India up so there seems to be some appetite, he adds.

Also Read: Broader mkt to do well; dip in FII inflow not a worry: CS

Rishav Dev, Equity Strategist Capital – Institutional Equities, Quant, too, is not much worried about the decline in fund flows. He says maybe the magnitude of flows has slowed, but it is inflows nonetheless and not outflows. Moreover, he adds, global factors are in India’s favour.

Dev believes November-December are the best months for emerging markets equities. According to him, equity inflows could be in excess of USD 25 billion this year.

Brandt, however, says flows into India equity funds have been quite flat. He says diversified funds like Asia Ex Japan funds, the amount of money they have been getting has scaled off significantly and that means less money channeled into India. At the same time, their allocations into India have been climbing, he adds.

“Going into September, the gem funds we track, their allocations into India were at highest level since we started tracking them in mid-1990’s. To a certain degree, there has been an offset in the money that these funds steer towards Asian markets at the moment. Their share to India has been on the increase,” Brandt told CNBC-TV18.

Below is the verbatim transcript of Rishav Dev and Cameron Brandt’s interview with Sumaira Abidi and Reema Tendulkar on CNBC-TV18.

Reema: The FII flows into India have hit seven month low in September. What is your sense? Will flows continue to remain as tepid as we saw in the month of September?

Brandt: We are certainly seeing edging towards more of a risk-off mindset among investors but I don’t think it’s written in stone that they will stay away for the rest of the year. A fair amount of money is piling up in money market funds, I think the institutional investors will like to deploy that once they get some certainty about the number of key issues and fund managers continue to talk India up so there seems to be some appetite.

Sumaira: What sense you are getting about how the picture for flows could shape up in FY15 or calendar year 2015 and what kind of a takeaway would that mean for you?

Dev: I totally agree with Neelkanth Mishra, Head of Equity Strategy – India, Credit Suisse that a dip in FII flows, a momentary dip — market should not be too concerned with it. One of the important points that everyone should factor in is that the last three months of the year are typically the best months for emerging markets. So we did a historical analysis on weekly inflows into emerging markets and developed markets and we found out that month of November and December are the best months for emerging market and this data is based on last 12 years data.

So a small dip does not matter – Rs 5,000 crore inflow in the month of September, nonetheless it was inflows, there was no outflows. So the magnitude and the pace of inflows have somewhat dried up because of global concerns but we know that the global factors are working in our favour in terms of the oil prices going down, the inflation is in check, remittances are increasing. So the global as well as local factors are keeping India attractive at the moment. So I would not be very concerned with a slowdown in the pace of inflows into India.

Reema: What would your overall estimate be? Currently, as things stand what have been the flows into Indian equity markets and how much can we pick up in the last three months of the year?

Dev: As I mentioned, few months back on your show that this year I am quite sure would be the record year in terms of FII flows. So our estimate is that I would not be surprised that if we get on the equity side alone, inflows in excess of USD 25 billion and if you combine that with the debt inflows, it would be a record year and as I mentioned that local factors as well as global factors are keeping India attractive and there has been — if you look at emerging market countries, India is the best right now. There are concerns in the China and there are protests happening in Hong Kong, the election mandate is not very clear in Brazil, Indonesia has a new government, Thailand has its own problem. So out of all the big emerging market countries, if any global fund manager has to increase its allocation, India is the best place right now. As Cameron Brandt mentioned that a lot of money has piled up on the money market front and that money will slowly and steadily flow into emerging markets. Third quarter of this calendar year, almost USD 87 billion of inflows were seen in money market funds. So that is the magnitude of amount lying in the money market front.

Sumaira: Is that a similar trend that you are spotting as well? Could you give us some number according to your data, how the flow has been into India, emerging markets, global equity funds?

Brandt: The trend has been very flat. Certainly for India equity funds, we are seeing a pattern somewhere between 100 million in or 100 million out each week, it is sort of yo-yoing a bit. What has changed in recent weeks is that, the big diversified funds like the Global Emerging Markets (GEM) funds, the Asia Ex Japan funds, the amount of money they have been getting has tailed off significantly and that means less money channeled into India. At the same time, their allocations into India have been climbing. Certainly, going into September, the GEM funds we track, their allocations for India were at highest level since we started tracking those funds back in mid 1990s. To some degree, an offset in the amount of money those funds have to steer towards Asian markets is down at the moment.

Reema: Walk us through the flows picture in the emerging markets. There is a slowdown in China, there were protests taking place in Hong Kong so has it impacted flows into these regions and conversely has it benefitted any countries?

Brandt: What we have really seen are two rotations, the biggest rotation is the one from retail institutional investors in terms of putting money into emerging market funds. The second rotation, which is much more modest, but is still significant has been the rotation from developed to emerging market funds. The overall picture is flat but the bias is towards emerging markets and towards emerging Asia in particular.

As I said earlier, the big gem funds have boosted their allocations not just for India, India is perhaps the most eye-catching but their allocation for emerging Asia is general is at the highest level in a couple of decades. What we have seen in the past couple of weeks is, definite move away from Europe and Japan equity funds, continued interest in funds that offer diversified exposure, more modest levels than we were seeing in the summer and certain amount of money coming into the US equity funds, but mostly into US ETF which suggests a more tactical investing and a sense that the US is the place to be.

Sumaira: Do you think the dollar strength that we are seeing actually could derail these flows into EMs?

Dev: It would be a country specific thing in terms of the dollar strength. Right now I think RBI is doing a fantastic job in keeping the rupee very stable and the thing here to note is that the low yielding currencies were the currencies that were hit the maximum and the high yielding currencies like rupee, were the currencies which were more stable. Rupee was stable because of the steps taken by the new government in terms of containing the fiscal deficit to 4.1 in terms of the GDP growth being above 5 percent last quarter. So I won’t be very concerned with rupee depreciating from here. It would be range bound between 58 and 62/USD. So the strength that dollar index is showing right now, more concern should be on the low yielding currencies rather than the high yielding currencies specifically India.

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