FIIs, hedge funds pull out as dollar rises, metal melts

FIIs, hedge funds pull out as dollar rises, metal melts
The Sensexs slide on Wednesday was triggered by hedge funds (HFs) trimming their arbitrage positions and a couple of FIIs booking profits early.

On Tuesday, the Federal Reserve had indicated strong dollar expectations for later this year, after which HFs cut exposure in global commodity markets and stocks in emerging markets such as India.

Much of the robust buying in emerging markets during the past few weeks was led by global liquidity and expectations of a weak dollar. The trend was, however, snapped over the past two days with the dollar rallying against the euro and other currencies, raising concerns of foreign flows drying up.

Stock prices plunged 4% in Brazil on Tuesday. Most Asian emerging markets were in the red today due to thinner foreign inflows. Hang Seng was down 2%, while prices dropped 1% in Taiwan.

HF activity also led to the crash in metal prices on the London Metal Exchange (aluminium prices fell about 7%). This pushed down Indian metal stocks like Nalco (down 10%). Dalal Street is no longer insulated from regional trends and the downturn in stock prices was triggered by the pullout of HF money in early trades today. HF money is known to be hot as it flows in and out of markets overnight, chasing returns.

Speculative positions based on a weakening dollar have also been wound up across Asia.
Foreign investors, especially HFs, borrow money on cheaper US interest rates and invest simultaneously in commodities and emerging stock markets.

They also take positions on the dollar and thus, much of their behaviour across markets varies with currency movements. In 04, HF money, however, constituted less than 25% of the over $8.3bn foreign inflows into Indian equities, as per Sebi officials.

Sources at a top American FII said Asian exposure of some FIIs and current country weightages are expected to go down. Most fund managers, however, said it was too soon for such drastic reactions.

DSP Merrill Lynch Indias executive vice-president, Andrew Holland told ET: There are concerns over short-term inflows going forward. But the two-day dollar strengthening is not much of a rally. It is difficult to say whether inflows will continue or stop. We believe the dollar will continue to weaken in the first half of this year with no major impact after this disaster in Asia. The markets needed a correction, everyone was booking profits and everyone is looking for excuses.

American FII, Morgan Stanley, is said to have pressed in some sales today though confirmations were not available. Record sensex highs led to profit booking by foreign investors, said an FII broker. Top foreign brokerage houses told ET that no major FII sales had taken place today and selling was largely from HFs.

On the positive side, the past two days have seen some block deals by foreign investors, signalling maintenance of status quo on long-term interests in India. A block deal of 12 lakh shares of Cummins India was reported in early trades today. A bigger block deal was reported from the same counter on Tuesday when Kirloskar Oil Engines sold 72 lakh shares to HSBC Global Investment Fund.

HSBC India treasurer Monish Tahilramani, however, said that adding to the overall nervousness on global fund flows is the scheduled release of crucial monthly US employment data this Friday, ahead of which HFs always curtail dollar, commodity (metal stocks had crashed in India a month ago too after which they recovered) and emerging stock market positions.

Fund flows out of the US depend on expectations of slow American economic growth. Any prospects of better growth in the US will mean investors will pump funds into US stocks, and flows to emerging markets will trickle.

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