As an Indian investor, you may well believe that trying to make money in the stock market is a frustrating affair. But there’s one set of investors who face an even tougher task than you do in getting reasonable returns: Foreign Portfolio Investors (FPIs).
To take home reasonable returns from their India investments, FPIs need not just rising stock prices but also favourable exchange rates. This hasn’t proved easy in recent years.
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The BSE Dollex 30, an index which translates the Rupee returns on the BSE Sensex basket into dollars based on prevailing exchange rates, is a commonly used gauge of foreign investors’ returns.
The Sensex 30 has beaten the Dollex 30 hands down on trailing returns over the last one-, five-, 10- and even 15-year period. While the Sensex 30 has delivered a 11.4% gain on a year-to-date basis in 2018 (as of September 14), the Dollex 30 is down by about 1%. Local investors who bought the Sensex basket ten years ago would have a 11.4% annual return to show, but the Dollex 30 has scrounged up just 7%. The lower returns are explained by the fact that while the rupee traded at 47 to a U.S. dollar in September 2008, the going rate today is 71.7.
In the 17 years since its inception, the Dollex 30 has outpaced the Sensex in eight years and lagged it in nine. But the real problem for foreign investors is that the Dollex fares much worse than the Sensex in big bear years.
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In 2008, hit by the global crisis, the Sensex nosedived by over 52%, but the Dollex plummeted by a steeper 61%. In 2011, the Dollex, with a 37% plunge, lost much more than the Sensex’s 25%. Periods of stock market turbulence in India are often accompanied by a slip-sliding rupee. Perversely though, the Dollex doesn’t always do better than the Sensex in good times. It beat the Sensex in bull years 2017, 2010 and 2009, but lagged it in 2014 and 2012.
Net-net, with rupee weakness magnifying market falls, foreign investors suffer though far bigger swings in their returns than domestic investors.
But with the Dollex hinting at modest as well as highly volatile returns for foreign investors, why are the FPIs such ardent fans of the Indian market? After all, despite the rupee headwinds, FPIs have been net buyers of Indian stocks in 14 of the last 17 years and have poured over $200 billion in net investments since 2001.
How they cope
One explanation could be that many FPIs are good timers of their buys and sells in the Indian market, which helps them benefit from the violent swings in stock prices and the rupee.
For instance, FPIs who bought into the Sensex basket in February 2009 and sold out in December 2010 would have notched up a cool 160% gain in less than two years, with exchange gains adding to returns. Foreign funds who jumped in in August 2013 and bailed out in February 2015 would have pocketed 70%.
It is also likely that long-term FPIs, aware of the exchange rate risks, hedge their India exposures to shield from rupee swings. While this would entail a cost, it would cushion such FPIs from the worst of rupee volatility.
But the most important factor to keep in mind is that FPIs aren’t one homogenous class of investors who behave like a herd of sheep.
FPI is an umbrella term that refers to a wide gamut of investors using different strategies. It includes individuals and family offices on one hand, but also savvy institutions like sovereign wealth funds, exchange traded funds, pension funds and hedge funds, on the other.
Not all of these investors rely on long-only strategies to make their returns. There’s also considerable churn in the identity of FPIs participating in India from year to year.
All this does not mean that the steadily depreciating rupee doesn’t make a difference to foreign investors. It does. But India’s ability to attract strong FPI flows despite this, suggests that many foreign investors have become adept at swimming against the tide.