Investors pull out $2.1 bn from BRIC funds

Stock market volatility forced investors across the world to pull out $5 billion from emerging market equity funds last week, including over $2 billion from funds focused on four BRIC markets.

China accounted for more than half of the total outflow from BRIC funds, while India, Russia and Brazil together shared the remainder, according to international fund tracking firm EPFR Global.

With sub-prime and global credit fears being fuelled by almost daily news of fresh write-downs in the financial sector and evidence mounting that the US economy will slow going into next year, investors retreated from equity funds during the second week of November and shifted to the relative safety of money market funds, EPFR said in its weekly report.

During the second week of November, emerging market equity funds reported a net outflow of $5.58 billion, while those focused on developed markets saw an outflow of $5.07 billion.

Nearly all the outflow from the developed and emerging markets appears to have been absorbed by the money market funds. According to EPFR, the money market funds recorded a net inflow of $10.1 billion during the week, taking their total inflow since the beginning of August to $100 billion.

Money market funds currently offer two things that investors like. They are very liquid, which allows investors to move rapidly back into markets where they see value, and most of them come with an implicit guarantee that you wont lose any money something that's very attractive in the current investment climate, EPFR Global Analyst Cameron Brandt said.

Source - PTI

What to do this Diwali?

From past market performance it is evident that Market tends to rise around Diwali time. Investors have a unshakable faith in this tradition as it also marks a new year according to Samvat calendar.

No doubt this diwali also we can see the market moving up as it usually happens, but, what after diwali. Offlate it seems Indian markets are not taking into consideration the global happenings. The US markets have been in standstill for almost a quarter now. The financial sector in US is worst hit by the ongoing subprime crisis and large financial houses like Merrill Lynch, Citibank etc have written off billions of dollar eroding shareholders wealth.

Even though the direct effects of subprime, on the Indian markets, are pretty limited. Any slowdown in US can dampen the earnings visibility of Indian companies. Around 80% of India's total exports are targeted to US continents.

Not only the subprime crisis, adding to it the US housing data is also slipping into negative territory. August reported New housing Construction dropping 20% on a yearly basis. The US housing prices is continuing to fall with a drop of 4.4% in august alone. The housing market in US have not found bottom yet and is expected to fall further as the housing inventory is currently massively over supplied.

How US housing effects India?. The major concern is that falling house prices will hurt consumer spending, which accounts for two-thirds of the US economy. This in turn will trigger the US consumers to lodge money in the bank, rather than going for a shopping spree. As we know India is a large supplier of home products ranging from textiles, wood to cookware to US, the exports of this will come to a stall and in turn put a question on the earnings visibility of these companies. Already these sectors are paring losses into their profits due to rupee appreciation. Textile being India's largest employment house can make many lose jobs.

Coming back to subprime, the trouble starts when large-sized funds (with exposure to highly leveraged sub prime markets) start liquidating their holdings in emerging markets to make good their losses in a sinking sub prime market. In the case of Chinese market, FIIs are not allowed to pull out money at their whims and fancies; there is a lock-in period for staying invested in that market. So evidently since India is receiving a huge inflow of FII's money into the stock market the risk of fear led fall in Indian markets is high.

What should Indian investors do after diwali?

1) Investors must use the diwali pre-market rally to book partial profits and sit on cash.
2) Invest only in fundamentally strong stocks which targets domestic consumption and are less dependent on US Economy. Stock in Power, Infrastructure would be a good bet to invest.
3) Monitor global cues at a regular basis before taking a long position in stock market.

Always remember "Cash is King". Cash in hand is worth a fortune rather it getting struck in a bear market.

Happy Deepavali.. Happy Investing