Mobius doubles down on India as fund exodus seen as fleeting
The Indian rupee's longest losing streak since May masks growing confidence among global investors in Prime Minister Narendra Modi's management of the world's fastest-growing major economy.
A combination of high yields, improving public finances, and room for interest-rate cuts will lure back foreign investors trimming emerging-market debt in the face of global risks such as a potential US rate increase, according to Franklin Templeton Investment Funds, Mirae Asset Global Investments Co, and GAM International Management Ltd. Foreign funds are selling Indian shares this month for the first time since February, while their bond holdings have fallen the most since June, as odds of a Federal Reserve rate hike rose.
"One of the most exciting things about India is Modi's reforms," Mark Mobius, the executive chairman of Templeton Emerging Markets Group, said at a Bloomberg event in Mumbai on Friday. "India is in a very sweet spot. It is our top emerging-market pick at the moment," he said.
Modi secured parliamentary approval for a national sales tax in August, a move seen as bolstering government revenue and economic growth. He also ensured a smooth transition at the central bank's helm, removing a key uncertainty for investors, and contributing to the rupee's 1.4 per cent gain last quarter. Indian sovereign bonds offer the highest 10year yield among major Asian markets after Indonesia, making local debt attractive for global funds amid negative rates in several developed nations.
"In times of a low-yield environment globally, the yield-hunting behaviour will continue to drive international investors to India," said Kim Jinha, head of global fixed income at Mirae Asset in Seoul, which manages $83 billion. "India's currency has shown much resilience against some of the notable headwinds and has seen limited volatility compared to other emerging-market currencies." The currency rose 0.1 per cent to 66.8525 per dollar in Mumbai on Monday, after weakening 0.3 per cent over the past five days to cap its third straight weekly decline. Its 3.2 per cent total return this half is second only to the Indonesian rupiah in Asia and only the yuan is viewed as more stable by options traders. At 4.90 per cent, the rupee's one-month implied volatility compares with 4.10 per cent for the Chinese yuan and 5.72 per cent for the Singapore dollar.
The rupee "retains its status in our minds of a low-beta 'defensive' long, likely to be eclipsed by other currencies in a generic emerging-market FX rally, but unlikely to selloff as dramatically during a downturn in global risk appetite," said Caroline Gorman, a London-based investment manager at GAM International. "I would expect minimal negative impact of a Federal Reserve rate hike this year."
Odds that the Fed will raise rates this year have risen to 68 per cent, from 59 per cent at the end of the last month. Foreign investors have sold $56.4 million of Indian shares this month, while their holdings of local government and corporate bonds have fallen by about ~6,600 crore ($987 million). That's after inflows into local stocks and notes last quarter were the biggest since March 2015.