Funds not dumping India yet, await attack fallout

By Jeffrey Hodgson and Nishant Kumar - Analysis

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."