Emerging market flows have surged in 2009 and crossed the 2007 high - something very few may have predicted at the start of the year.
Although 2009 FII flows into India have yet to cross the 2007 high, the election results marked a big change in India's share of these flows (from 17% to 27%). Of course, not all flows into India are sourced from EM funds but the comon gives us an insight to India's relative position in portfolio flows over time.
At the same time though equity market performance has trailed EM. If one excludes the performance of Indian equities on the day after the election result (May 18th), which is only appropriate given the lack of trading on that day, Indian equities have lagged emerging equities despite gaining share in flows. Several reasons can be attributed to the 6% under performance by Indian equities post the election result day include increased equity supply, richer equity valuations, progress on reforms and infrastructure spending being slower than expectations by certain quarters, tightening signals from the RBI and the sharp 21% re-rating of equities on May 18th. The rise in flows underpins investor confidence that the strong government formation post the election results will eventually provide impetus to India's improving macro. We expect the under-performance to reverse and share of flows to remain strong in the coming months.
Inputs from Morgan Stanely.
