Pension funds trim India bets, assets down nearly Rs 60,000 cr in 2022

China's reopening of the economy could be one factor for the trend, say analysts

Pension funds, among the largest long-term sources of foreign portfolio inflows, scaled back their India bets in 2022.

The value of their holdings has fallen by 13.3 per cent or Rs 57,242 crore, from Rs 4.3 trillion at the end of 2021 to Rs 3.7 trillion when December closed in 2022, shows an analysis of the depository data.

Overall equity investment by foreign portfolio investors (FPIs) in India dropped 0.5 per cent from Rs 48.6 trillion to Rs 48.3 trillion in the same period. The benchmark S&P BSE Sensex gained 4.4 per cent.

A large part of the outflows happened in the first half of 2022, according to Rajnish Girdhar, chief executive officer, Mumbai-based Karma Capital, which provides investment management and advisory service to sovereign wealth funds and other global institutions.

“A significant amount of money … came back into India from July onwards … till about the last two weeks of December, when we again saw outflows; and then … we saw outflows in January,” he said.

India’s weighting went up as people turned negative on China in the second half of the year, and that has now reversed, he added. But the outlook for flows over the medium term remains positive, he added.

Sovereign wealth funds have seen their allocation increase in the same period by Rs 16,199 crore. Their share in the overall FPI pie has increased to 6.4 per cent from 6 per cent earlier.

Pension funds and sovereign wealth funds saw their share in FPI assets fall to 14.1 per cent by December 2022 compared to 14.9 per cent in December 2021, driven largely by the fall in pension fund assets.

Pension funds in the US may have taken money out to make up for fixed-income losses and poor domestic equity market performance in the US, according to a person who tracks the segment. Sovereign wealth funds from West Asia and of Nordic origin, which benefited from rising oil prices, stand to make higher allocations, the person added.

Both kinds of institutions typically invest for long periods and are considered a source of stable foreign capital. While allocations fell in 2022, they are still higher than the 13.6 per cent share in FPI assets as of December 2019, before the pandemic took hold globally.

University-related endowment funds are another long-term player which has been increasing India allocations. Their equity investment in India rose to Rs 20,318 crore as of 2022-end, compared to Rs 18,810 crore in the previous year. They accounted for Rs 8,251 crore in December 2019.

Independent market analyst Anand Tandon said foreign investor inflows might not be as high as they were in the past, and much might depend on China.

“(If) … China is open for business … the valuation there is so compelling right now that you will have to allocate more money there. If you don’t allocate, to that extent India may not see major outflows,” he said.

The MSCI China index was trading at a price/earnings ratio of 10.43 compared to 21.42 for the MSCI India index as of December 2022. The price/earnings ratio is a valuation measure, and higher numbers indicate more expensive valuations.

Foreign portfolio investors were net sellers to the tune of Rs 1.25 trillion in 2022. Domestic institutions were net buyers of Rs 2.8 trillion during the same period. They have also exceeded FPI outflows for January.

Foreign investors net sold stocks worth over Rs 13,000 crore while domestic institutions bought more than Rs 19,000 crore.