Strategy: The Shanghai-HK Stock Connect program soaks up US$11 bn of regional flows :: Kotak Securities

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Strategy: The Shanghai-HK Stock Connect program soaks up US$11 bn of
regional flows
 Country flows - the Shanghai-HK Stock Connect program attracts US$11
bn in two months
 Country allocations - India scales new high; China A shares impact on
benchmarks to be severe
 Fund flows - funds benchmarked to MSCI EM Index see redemptions worth
US$10 bn

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The Shanghai-HK Stock Connect program soaks up US$11 bn of regional flows.
KIE’s foreign fund-flow tracker gives us a comprehensive view of market flow activity by
listed funds into India and its emerging market peers. These market participants are
further classified based on their investment styles (passive ETFs or active non-ETFs) in an
attempt to understand the intent and sentiments governing the flows.

Country flows—the Shanghai-HK Stock Connect program attracts US$11 bn in two months

We believe the recently introduced Shanghai-Hong Kong Stock Connect program may be

responsible for soaking up some of the regional liquidity in December. The program has

attracted US$11 bn in the past two months (see Exhibit 1) with the Shanghai market rallying

21% in December alone. Headroom exists with US$35 bn of the total aggregated quota

(US$49 bn) still available to investors on the program. Against this backdrop, EM-focused listed

funds sold equities across the region. For India, December saw FPIs turning net sellers (US$0.1

mn) for the first time in 10 months. Listed funds recorded outflows worth US$0.9 bn as

regional selling overshadowed India-focused passive inflows in the month. For CY2014, the

total FPI inflows stood at US$16 bn. India-dedicated ETFs pumped in capital worth US$2.5 bn

during the period even as India-focused active funds saw another year of redemptions (US$1.1

bn).

Country allocations—India scales new high; China A shares impact on benchmarks to be severe

Investors have continued to increase their exposure to India over the year. Asia ex-Japan funds

have allocated 13.7% to India in November (up 2.3% in the past 12 months). GEM funds have

seen allocation to India move from 9% to 11.8% during the same period. Currently, Asia-ex

Japan funds (17.4%) and GEM funds (17.9%) have a substantial exposure to China. As

accessibility to China’s A shares improves, global benchmark rebalancing may begin considering

these securities in the investable EM universe. These can have severe implications across the

region. Although the inclusion is expected to be staggered, India’s weight can see ~16% drop

in the emerging market indices in the entire duration of the exercise.

Fund flows—funds benchmarked to MSCI EM Index see redemptions worth US$10 bn

Passive and active EM-focused funds continued to see redemptions in December. ETFs tracking

the MSCI EM Index recorded outflows worth US$4.7 bn while active managers saw

redemptions worth US$5.7 bn in the past 12 weeks. Passive funds benchmarked to the MSCI

India have remained resilient with US$0.5 bn of inflows in the same period. 

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily13012015ba.pdf