Heavy foreign selling in South Korea and Taiwan has not translated into a capital rotation towards Indian equities. India has instead seen $31 billion in foreign outflows this year, even as foreign investors have exited more than $150-200 billion from the two East Asian markets, Bernstein said in its latest note.
The brokerage said the divergence challenges the assumption that money leaving one market will automatically find its way into another. India’s ability to attract foreign capital cannot be inferred from selling elsewhere, particularly when much of that activity is driven by local market dynamics.
Leveraged positions in South Korea and Taiwan are a case in point. Taiwan’s margin-loan balance reached a nominal record in July, while South Korea has seen substantial activity in leveraged exchange-traded funds (ETFs). Bernstein said such locally financed positions are not a ready-made source of cross-border equity flows.
“Selling elsewhere has not translated into an Indian windfall till now,” the brokerage said, adding that much of the capital exiting these markets was never earmarked for India.
The distinction also applies to portfolio allocations. A fund’s India weight can rise even as it sells Indian shares, if the fund’s overall assets shrink faster. Bernstein illustrated this with a $100 billion fund holding 10% in India: if its assets fall to $80 billion, India’s allocation could rise to 12% despite a reduction in the absolute value of its Indian holdings.