Contrary to popular perception, overseas investors' love affair with India has hardly soured. Or so says Christopher Wood , the Hong Kong-based CLSA equity strategist with something of a rock star reputation in the Asian investing world for the astute commentary he dispenses in his widely read newsletter, Greed & Fear. If anything, the top-ranked analyst with his trademark shock of curly, shoulderlength, salt-and-pepper hair finds the absence of selling pressure from foreign investors "remarkable", considering the huge disappointment that investing in the Indian market has been for foreigners in 2011.
The numbers tell the story: by June 10 this year, the Sensex had slumped about 11% in US dollar terms from end 2010, securing a place alongside Egypt and Tunisia among the world's 10 worst-performing equity markets (see graphic 1).
Yet, foreign institutional investors (FIIs), who poured $29 billion into Indian equities last year, haven't panicked. Their cumulative net investment in India up to June 9 was $52.5 million.
It's not a number to write home about - not only is it a fraction of the money that the Indonesian and the Taiwanese markets have received, even Pakistan has done better than India (see graphic 2). But although net foreign buying, which subtracts sales from purchases, has been in the negative territory for most of this year, the divestment by foreigners has been relatively benign compared with 2008, a year most investors in the Indian - and indeed global - markets would like to forget.
Wood says he can only attribute the resilience of foreign investors "to the continuing belief in the potential of the Indian growth story, both from a top-down and bottom-up perspectives".
Rational To Bet On India?
Is this a rational belief? On that question, opinion is divided.
Growth in the Indian economy is slowing. Jim Walker of Asianomics in Hong Kong cites the 0.1% dip in gross fixed capital asset formation in the March quarter, the first decline in almost two years in this broad measure of investment demand across the economy, to conclude that "capital expenditure cycle in India has turned decisively for worse".
Even maintaining 8% expansion in gross domestic product this year will prove "challenging", notes Walker.
The deterioration in investment demand is also evident in corporate order books. According to data compiled by Morgan Stanley analysts Akshay Soni and Pratima Swaminathan, order backlogs for engineering and construction companies show that the recovery from the credit crisis that had begun in the December 2009 quarter - after the United Progressive Alliance (UPA) government returned to power in May of that year minus the baggage of the Left parties - began to peter out just a few months later at the onset of the European debt crisis. The slowdown in capital-goods order growth worsened in the final months of 2010 and the first quarter of calendar year 2011 as sordid tales of widespread corruption started surfacing - the 2G spectrum allocation scam; the loans-againstbribes swindle; the Adarsh Housing Society scandal; the Commonwealth Games loot; the list goes on.
Graft and bad governance are only part of the story. Investor sentiment has also been shaken by the rising cost of capital. Aggressive interest-rate increases by the Reserve Bank of India (RBI) have reduced the expected return on equity capital in many infrastructure projects to below the hurdle rate at which investors would like to undertake these risky endeavours.
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