Tuesday, October 23, 2007

India gyrates as the World and his wife want in

Efforts by India to control massive flows of money into its markets have prompted two sharp falls and one new all-time high, all in two days. Welcome to emerging markets, the world's new favorite asset class.

India on Wednesday shocked investors by announcing planned new curbs on investment in its equities by anonymous overseas funds, sparking a selloff in Bombay of as much as nine percent.

But after the panic selling, it was back to panic buying, followed shortly by more panic selling. India's benchmark Sensex (.BSESN: Quote, Profile, Research) index hit another all-time high on Thursday before falling again to end the day 5 percent down.

The Sensex is now up 30 percent this year and almost 15 percent since the Federal Reserve cut rates in September.

Expect the wild ride to continue, as recent data show that the World, his wife, their milkman and the neighborhood stray cat are all going long emerging markets at the same time.

A Merrill Lynch poll of global fund managers controlling $671 billion of assets showed a stampede into emerging markets in October. A total of 61 percent of funds were aggressively or moderately overweight emerging market equities, up 50 percent since August and the most since April 2004.

Twenty percent of funds were "aggressively overweight" emerging market stocks, compared to just 4 percent on U.S. shares and 1 percent on UK shares.

What's more funds in all regions outside of emerging markets said they were looking for stocks with exposure to overseas demand, a strong indication that even those unable to buy emerging markets are seeking to get exposure to growth there.

Why? Investors are worried that growth in the developed world will be crimped by the bursting of the housing and credit bubbles and see emerging markets as the sole hope.

"People have become more pessimistic about the developed world and emerging markets are seen as the oasis," said David Bowers, an independent consultant to Merrill Lynch on the survey.

"There is a cast-iron belief that emerging markets and China are bomb proof when it comes to the rest of the world slowing."

"The bull case is that there is a shortage of organic growth anywhere else because companies have been run for cash and not for growth the past five years (in the developed world)," he said.


India's experience in the past couple of days is an object lesson in the distortions and strains this phenomenon is causing.

India is concerned about flows into its economy and share markets, partly because some of the flows are so-called hedge fund "hot money" and partly because it has driven a rise in the value of the rupee which is complicating Indian authorities' attempts to manage the economy and monetary policy.

The Securities and Exchange Board of India said it would over 18 month wind down participatory note programs, which are used by foreigners, often hedge funds, to invest in shares anonymously.

Foreign institutions have put more than $17 billion in Indian shares this year, as against a record $10.7 billion in 2005.

There is a lot of money that wants in, but not enough to invest in. Initial public offerings were $6.8 billion through September, a new record on even a full year basis, but you can expect that there will be much more securities issuance to come throughout emerging markets, and not just in equities.

A host of emerging market bonds have been launched to warm receptions in recent days, despite continuing difficulties in many other debt markets.

Sri Lanka, which is contending with a long-running rebellion and 17 percent inflation, found that not only was it able to make its debut issue, borrowing for a long five years, but that the $500 million deal drew commitments of $1.25 billion.

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