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Five reasons why FIIs are low on Budget, high on D-Street
September, 12th 2014

The Government of India presented its first Union Budget 2014 last week under the administration of Prime Minister Narendra Modi, which left most of foreign institutional investors (FIIs) longing for more from Arun Jaitley.

The markets had high expectations about a reformist Budget changing the course of the economy, but all that didn't come through. The markets have plunged nearly 2 per cent since the Budget day last week.

"When I compare my excitements about Modi and what it could mean for the country, I was a little disappointed. There was nothing bold there. Maybe it was because they had only six weeks. But I was looking for something more. So I am slightly disappointed," said Jim O'Neill, former Chairman of Goldman Sachs AM.

However, even though the Budget 2014 left many disappointed as well as a lot to be desired, FIIs are still betting on the long-term India story, which they feel is still intact.

"There is definitely some disappointment - both with the Railway Budget and the Union Budget. The government did a great job, but market expectations were too high. While investors expect a lot from the government, these expectations could not be quantified properly," said Bhuvnesh Singh, MD, HoR-India of Barclays.

"It is more about what the government does outside the budget - what administrative reforms they will bring in, how they can control inflation, etc, which will be the key. These short-term volatilities are a time to buy the market and not get worried about how the mood of the investors is changing by the day," he added.

We have collated a list of five factors which affirm FIIs' stand on the Indian markets:

Best Performing Market among China, Nikkei, Hang Seng & Kospi:

The S&P BSE Sensex has rallied a little over 18 per cent so far in the year 2014, compared to over 2 per cent fall seen in the Shanghai Stock Exchange, and over 6 per cent fall seen in the Japanese stock market (Nikkei). Hang Seng index rose nearly 1 per cent, while Kospi was still trading flat.

"If we look at India today, it is the best performing emerging market year to date. There has been a lot of momentum built into the market by investors," said Medha Samant, Investment Director, Fidelity Worldwide Investment.

"Flows into the Indian equity space - the cash equity space - amount to $11.5 billion year to date. It is still quite encouraging," added Samant.

India still not a 'crowded' trade:

Most FIIs are positive about India and they are choosing the right stocks and entry points very carefully by deploying a bottom-up-approach.

"I do not think that India has become a crowded trade. Most of the large-long investors are still not into Indian cyclicals. They might be overweight on IT services or pharmaceutical which are not India-centric," said Bhuvnesh Singh, MD, HoR-India of Barclays.

"From a three-year basis, the amount of interest which we have in India today is unprecedented. If in the next three months we have a flattish market, we would see significant buying coming in into India," he added.
As per experts, most FIIs are of the opinion that India has an abundance of opportunities from a bottom-up viewpoint. They stay selective, especially when there is a lot of froth built up in stock market indices.

Medha Samant, Investment Director, Fidelity Worldwide Investment, is of the view that India has really run up a lot. But from a Fidelity perspective, the Indian stock market is looking really bottom-up. We are looking at a bottom-up portfolio construction.

"We look at India from a stock-by-stock basis. Apart from the large cap space, we continue to find opportunities also in the midcap or the small cap universe," added Samant.

FII flows into Indian markets YTD:

Overseas investors have poured in nearly Rs 17,000 crore in the Indian markets since the beginning of the month. Since the beginning of the year, foreign investors have made a net investment of Rs 1.4 lakh crore (about $23 billion) into the country's securities market. This includes a net investment of Rs 67,300 crore in equities and Rs 72,120 crore in the debt market.

Betting on reforms in the long run:

According to experts, foreign investors have been betting on the Indian market mainly on reform agenda of the new government at Centre to boost economic growth and revive the investment cycle in Asia's third largest economy.

The Budget tried to boost consumption and investment to revive growth. It provided scope to promote investment, it pushed public-sector units (PSU) to ramp up investment, provides investment allowance to firms undertaking fresh projects, increases budgetary allocation to infrastructure areas like roads, ports and shipping, storage and urban development etc.

"The revised FY15 fiscal deficit math has two positive messages. First, sticking to the interim fiscal deficit target at 4.1% of GDP sends a strong message on the government's intent to adhere to a fiscal consolidation path," Standard Chartered said in a note.

It is beyond doubt that the government is on a path of fiscal consolidation which was something the BJP manifesto had spoken. This was a budget which has laid a roadmap in terms of where the government wants to go, say analysts.

"The markets will also have to tone down expectations of a magic wand, because this is a slowdown that is deep not only in India but globally. So it will take time for things to turn around," said Indranil Sengupta, India Chief Economist, BofA-ML.

"The Finance Minister has spoken of two to three years before we hit 7% to 8% growth. At Merrill Lynch, we think we will hit 7.5% growth in 2018," added Sengupta.

Future Outlook on markets:

Most global brokerage houses and analysts back home have raised target for the markets post-Budget 2014. Morgan Stanley last week raised the BSE benchmark sensitive index, Sensex, June 2015 target by nine percent to 28,800 and said that policy makers are moving in the right direction towards reviving investor sentiment.
The global brokerage firm said the big picture reading from the budget statement is that policy makers are moving in the right direction toward cutting back on redistributive policies and reviving investment sentiment and this would have a positive impact from a stock market perspective, added the report.

Singh of Barclays is of the view that the support in the market today is based on the expectations from this government, of what it can do over the next three years.

From my perspective, buying the market from a three-year basis, notwithstanding the short-term correction whether they are 4 per cent or 10 per cent, is the right strategy for today, he added.

Most analysts back home are also advising their clients to pick up stocks on every correction as the long-term story for India remains intact.

R Sreesankar of Prabhudas Lilladher is of the view that sustained growth in the economy should lead to sustained growth in earnings as well and that will be a key factor which will take the market to a new high.

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