Why foreign capital flows may shift from India to China and South Korea

Could the flow of foreign capital shift from India to China and South Korea over the coming quarters?

Well, at least two global fund houses seem to think so. Strategists at Goldman Sachs Group Inc. expect Asia’s equity leadership to shift from Southeast Asia and India to markets like China and South Korea next year. 

Separately, Societe Generale SA says Taiwan’s tech-heavy market is also at an inflection point. And Jefferies Financial Group Inc. has echoed similar views, according to a Bloomberg report.

But why is this shift happening?

According to the Bloomberg report, stocks listed in Hong Kong as well as South Korea and Taiwan have languished for most of the year owing to their heavy reliance on China’s economy, which has been crimped by stringent Covid controls and a property crisis. Meanwhile, domestic-demand driven southern markets of Indonesia and India boasted resilience. The tables have turned this month after a slew of positive policy moves by Beijing.

How have markets like Hong Kong and Taiwan performed in the recent past?

Key equity gauges in Hong Kong have rallied about 20% in November, easily topping the rest of Asia and major global peers, as China urged more targeted Covid restrictions and boosted policy support for the real estate sector.

Foreigners have piled $5.8 billion into Taiwan stocks this month, on track for the first inflows in six months and the biggest in 15 years. Net purchases of Korean shares are set to exceed $2 billion for a second straight month.

But how does it compare with markets like Indonesia?

In contrast, Indonesia’s market -- once investors’ favorite as an inflation hedge -- is flat in November, and poised to see monthly flows turn negative for the first time since July. Investors are also more wary about valuations in India, where benchmarks recently hit record highs, with Goldman Sachs expecting the market to relatively underperform in 2023.

Is the chip industry also responsible for this upswing? 

The bullish case for South Korea and Taiwan is also built on their chip dominance, as the markets are home to industry heavyweights such as Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. They also have China as their largest trading partner.

SocGen and Lombard Odier Private Bank this month joined Morgan Stanley in saying that investors should tip-toe back into Asia’s semiconductor stocks.

Chinese shares in Hong Kong are poised for their best monthly showing since 2006, as asset managers from M&G Investments and Eastspring Investments to Franklin Templeton Investments buy into the rally.

On the mainland, foreign funds have snapped up about 49 billion yuan ($6.8 billion) worth of stocks via trading links with Hong Kong.

But are there any risks?

With their heavy export dependence, the markets are vulnerable to the risk of a global recession and are often at the center of geopolitical tensions that involve the US and China. Further, a jump in virus cases in China to a record is also tempering the positive market momentum.

Does this mean no foreign investors are likely to buy into the India story?

Not really. In fact, far from it. As a Press Trust of India report points out, foreign portfolio investors have rediscovered their liking for Indian equities, making a net investment of Rs 31,630 crore in November on hopes of an end to the aggressive rate hikes, and positivity about overall macroeconomic trends. According to experts, after remaining net sellers in August and September, foreign portfolio investors (FPIs) are unlikely to be major sellers going forward, the report said.

Rising expectations of aggressive rate hike cycles nearing an end on relatively easing inflationary curve, better than expected US macroeconomics data and resilience of the Indian economy compared to global counterparts are also driving FPI inflows.

According to data available with the depositories, FPIs invested a net sum of Rs 31,630 crore in equities during November 1-25. In comparison, there was a net outflow of Rs 8 crore and Rs 7,624 crore in October and September, respectively.

How have FPI inflow-outflow trends been like, over the past few months?

According to data available with the depositories, FPIs invested a net sum of Rs 31,630 crore in equities during November 1-25. In comparison, there was a net outflow of Rs 8 crore and Rs 7,624 crore in October and September, respectively.

In August, FPIs were net buyers to the tune of 51,200 crore and they purchased equities worth nearly Rs 5,000 crore in July.

Prior to this positive trend, FPIs remained net sellers for nine straight months starting October 2021.

How are FPI inflows likely to pan out over the next few months?

Going ahead, FPI flows are expected to remain volatile in the near term given the geo-political concerns, Shrikant Chouhan, Head - Equity Research (Retail), Kotak Securities, said.

So far this year, the total outflow by FPIs in equities stood at Rs 1.37 lakh crore.

What really is leading to this upsurge in inflows?

According to the PTI report, the spurt in net inflows in November could be attributed to recent surge in equity markets, stability in the Indian economy compared to its global counterparts and stabilisation in the rupee. 

On the global front, lower than anticipated rise in inflation in the US raised hopes that the Federal Reserve may not go for further aggressive rate hikes, which also eased recessionary concerns in the US. This helped improve sentiments and directed foreign flows towards Indian shores.

Which sectors are seeing the highest inflows?

In terms of sectors, FPI buying was seen in financial services, IT, autos and capital goods.

Have the Indian debt markets seen similar interest from FPIs?

Not really. According to the report, foreign investors have pulled out nearly Rs 2,300 crore from the debt market during the period under review.