The foreign institutional investor tally for 2007 is now well over $17 billion. While recognising that it is one of the key propellants of stock prices, it may be important to ask where this money is coming in from, if only to understand whether it is sustainable. The foreign portfolio investor is not one homogenous beast; the definition straddles all sorts of exotic creatures from across the global jungle.
Much of the $11 billion, which has come in during the Sensex’s journey from 15,000 to 19,000, is from new investors, and the reason why it is not getting reflected adequately in the weekly flows of global emerging market funds. A lion’s share of this is through participatory notes, hence it is not always easy to get to the bottom of where it actually has its genesis.
A large number of sophisticated investors, who we can loosely call absolute return funds, scour the globe for superior returns. When they see a market with good fundamentals and excellent price momentum, like India, they come in droves
On the margin, these are the guys who are probably setting this scorching pace for our market right now. Some of these funds are leveraged, some use currency carry trades as well, so their presence can potentially create some volatility if the price momentum is disturbed.
It would be incorrect to think that it is only this new money that is driving stock prices. Global emerging market funds, too, have received lots of money since September and have little recourse but to invest the money that they get from their investors.
Added to this is the fact that a number of long-only funds have actually been forced to change their cynical view of India, by the sheer force of market performance. Many of the erstwhile bears are now converted India bulls. The grapevine also suggests that there is a significant amount of money coming in from relatively new Asian geographies like China and West Asia. These pools of money are so large that $11 billion is a drop in the ocean.
Sustainability of flows is not an issue if fundamentals remain supportive. As one foreign fund manager remarked recently, “It’s not how much we can pour in, it is how much you can take without getting hurt.”
(The writer is Executive Editor, CNBC-TV 18)