Funds not dumping India yet, await attack fallout

HONG KONG/MUMBAI Fri Nov 28, 2008 8:07am EST

Policemen stand guard outside the Taj Hotel in Mumbai November 27, 2008. REUTERS/Arko Datta

Policemen stand guard outside the Taj Hotel in Mumbai November 27, 2008.

Credit: Reuters/Arko Datta

HONG KONG/MUMBAI (Reuters) - Deadly attacks on India's financial capital look unlikely to trigger major selling by foreign fund houses, but this could change if the killings lead to wider violence between the country's religious groups.

Emerging market fund managers said on Friday that for long-term investors, even the attacks of the magnitude seen this week are overshadowed by issues like growth rates and interest rate policy, assuming the fallout remains contained.

The fact that billions of dollars have already left the country as the global financial crisis sparked a stock market selloff also means remaining investors may be longer-term in outlook and focused on now-lower valuations, they said.

"This is not going to alter our view in terms of how we see India. The economic fundamentals are far more important than these events," Anthony Muh, head of Asia Pacific for AT Asset Management in Hong Kong, said of the attacks by Islamic militants.

"Things like this would only factor and impact more meaningfully from a longer-term investor perspective if it did eventually lead to destabilizing the government, which led to a fundamental shift in its policy."

Hindu-dominated India, which has a sizeable Muslim minority, has been hit by militant attacks for decades.

AT Asset manages about $1 billion in assets, about 8 percent of which is invested in India. Muh said the firm was already underweight India relative to fund benchmarks before the attacks amid concern about its decision to hike interest rates earlier this year.

But he said it was reviewing India's weighting, and was encouraged by the likelihood that its central bank will cut rates.

WEIGHTINGS ALREADY DOWN

India's stock market opened weaker on Friday before moving into positive territory, as trading resumed after the attacks in Mumbai which killed at least 121 people and led to a one-day closure of the city's financial markets.

The benchmark share index is still down more than 50 percent this year. Foreign investors have sold a net $13.7 billion of stocks as the market tumbled from record highs hit early this year, a marked turnaround from record buying of $17.4 billion in 2007.

India's weighting in the MSCI all-country Asia index had already dropped to 3.63 percent as of Thursday, compared with 5.15 percent 12 months ago. The country has a small 0.59 percent weighting in the all-country world index

Only 19 of nearly 10,000 global offshore equity funds tracked by Thomson Reuters Lipper had India as their top country exposure, according to the most recent data. About 450 of them had India among their top-10 country exposure.

"A lot of the hot money had already left," said Alistair Thompson, deputy head of Asia Pacific (ex-Japan) Equities with First State Investments in Singapore.

"Valuations are now beginning to look really attractive. I'd imagine genuine long-term investors would be looking very closely ... to see if they can pickup some high quality names at much cheaper prices."

First State manages about $17 billion in its Asia-Pacific and global emerging funds, about 5 percent of which is invested in India. Thompson said he was not selling as a result of the attacks but that he did view increased religious tension as a major long-term risk.

Other global fund houses with significant investments in India include Franklin Resources Inc and JPMorgan Chase & Co, whose JF India fund was worth more than $1.2 billion at the end of September.

JF Asset said in a statement that India remained neutral in its regional portfolios and that there had been no change in its investment strategy. It said the markets could shake off the effect of the attack, assuming political parties do not use this as an excuse to fuel communal tension.

Foreign fund managers did express concern that the attacks could hit foreign capital inflows, a significant worry given the country's current account deficit, and said that the country's already high political risk premium could rise even further.

But they said this would also have to be taken in the context of the long-term potential for the world's second most populous country.

"While the human toll of yesterday's terrorist attack in Mumbai was severe, the medium to long term economic impact is likely to be more muted as unfortunately, India is no stranger to terrorist attacks," said Bratin Sanyal, head Asian equity investments with ING's fund management arm.

(Additional reporting by Kevin Plumberg; Editing by Lincoln Feast)