FII Inflows in India vs QE-II – Is there any relation?

Very often, we say that the FII inflows in India lead to domestic indices’ upward movement. To a large extent, it is true. Post the economic bleak in 2008, the advanced nations cut their interest rates to spur the economy which has almost dried. Developed nations like US announced a series of quantitative easing and credit easing programs in a bid to aid faster recovery and fight deflation. It is widely believed in academia that QE-I and QE-II leads to increasing capital flows into the emerging market economies (EMEs). This also holds true for India as we largely believed that QE-II led to large FIIs inflows in India.

However, Anand Shankar, Reserve Bank of India (RBI) in his paper “QE-II and FII inflows into India – Is there a Connection?” says that FII inflows have fallen after the November 03, 2010 announcement of QE-II by Fed which is very contradictory to popular belief of increased inflows.

The first phase of longer term asset purchase in the US was terminated on Mar 31, 2010, with about $1.75 trillion worth of asset purchase by the Fed between Nov 2008 and Mar 2010.  However, this injection seemed insufficient to aid faster recovery and fight deflation and control unemployment rate. On Nov 03, 2010, the US’s Fed announced another series of quantitative easing, widely known as QE-II worth $ 600 billion over an eight month period along with reinvestment of principal payments from agency debt and mortgage backed securities to the tune of $ 250 billion - $ 300 billion.

Anand Shankar further says,

“One would have expected the FII inflows to increase significantly after November 3, 2010 announcement of additional purchase of treasury securities. However, results suggest that FII flows have indeed fallen in the period after November 3, 2010. One explanation is that since the markets had already anticipated and factored in the effect of QE in their behavior, they were not surprised by the announcement of QE-II on November 3, 2010.”

The paper says that there have been other factors which led to movement of FII inflows in India in that period. The paper results suggest,

“Post the announcement of QE-2, FII inflows have fallen significantly. The fall in FII inflows post November 3, 2010 has been explained via factors negatively affecting stock market returns in India using global and domestic factors which include sovereign debt problems in the Euro-area, political tensions between North and South Korea and in the MENA region, high inflation in India and policy rate hikes by Reserve Bank of India.”

This finding has been explained using expectation factoring behavior of market participants and developments in India and abroad.

A nice analysis by Anand Shankar; thanks to RBI.

Cash Strapped or Cash Hoardings – Look at these numbers

The world might be running high of rising asset prices and abundant liquidity which have heightened the inflation across the world. Last day, the republic of China raised its bank reserve requirements by 50 bps, the sixth time in less than a year and 4^th time in last 2 months in order to tame the inflation. Liquidity in the financial system has been another issue around the globe after the financial crisis. However, it eased after the developed countries announced a series of quantitative measures to ease the situation with US coming out with TARP, QE-I and now QE-II.  Sovereign crisis fear the European region which has questioned the existence of a unified region.

Amidst all these developments, many financially sound companies or marginally affected due to globe hoarded the money awaiting the new ideas for which they hoarded the cash in large quantum. The VRS Research team at Standard & Poor with the help of Capital IQ data examined the top 50 publicly traded companies globally, excluding financials, ranked by their latest reported quarter’s total cash and short-term investment holdings. The sum total for these companies’ cash balances is approximately US $ 1.08 trillion, almost near to cash holding for the entire S&P 500 Index.

We found 17 U.S.-based companies among the top 50 global corporate cash holders--which means that among specific nations, two-thirds of the top 50 global cash holding companies are headquartered outside of the U.S. From the perspective of dollar amounts, the 17 U.S companies account for $458.2 billion, or about 42%, of the top 50's global cash holdings. Meanwhile, the cumulative cash holdings of the 13 companies located in Asia and Australia, among the 50 below, amount to more than $270.1 billion, or about 25% of the group's total. In Europe, we find 17 companies among the top 50 global cash holders with aggregate cash holding total of $287.7 billion, or about 27% of cash balances among the global top 50.

With the abundance of capital abroad, there is a likelihood possibility that the firms may go for increased cross-border mergers and acquisitions as well as for strong earnings growth outside the U.S. After 2008 crisis, this domain has almost died given the tight liquidity scenario in their home country and globally. However, currently, the list could serve as a starting resource for ideas on who may be buying, where deals could occur, and possibly where profits may emerge.

Happy Investing! Happy Reading!

-        -   Amar Ranu

(Permission sought from S&P to post their articles on this blog)

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Aiding the economy: What the Fed did and why

Aiding the economy: What the Fed did and why?

For a quite long time, all the economies have been struggling to keep pace or evolve after the worst financial crisis (last we had in 1930s). More monies were pumped into throughout the world amounting into trillion of dollars - US had QE-I followed by QE-II and various other measures by other countries too.
QE II may be a fait accompli but the Fed Governor justifies it citing the high unemployment rate and low inflation. Read his opinion Aiding the economy: Why the Fed did and why
Enjoy reading!