>INDIA EQUITY STRATEGY (CITI)

Owning India Inc.: Foreign Ownership – Ebb...Before the Swell?

■ Market EBB: Foreign ownership at a 6-year low of 15.03% — Foreign ownership in the Indian market has hit a 6-year low of 15.03% as at March 2009 (latest data), valuing foreign ownership at c.$86bn, but falling 56bps in the quarter ($1.3bn outflow). This is a long way from the September 2007 peak of 21% ownership, a value high of $260bn, and an annual inflow peak of $17bn (CY2007).

■ Market SWELL: There has been a foreign flood — We estimate inflows from April-to date of $4.1bn have raised foreign ownership levels to c.15.6% of India’s Top500 companies, and that this portfolio value is now c.$130bn. This is amongst the most concentrated foreign inflows (Sept-Oct 2007 ($9.1bn) was the biggest, but there were outflows thereafter). This flood of funds is almost all foreign with domestic MFs negative in current quarter. Domestic Insurance (over a third of foreign money now) should be positive and stable (but no reliable intra-quarter data).

■ Underweight India/Equities: Domestic getting more defensive than foreigners — Institutional investors started the April quarter relatively defensively: a) FII’s underweight MSCI 46bps, b) Domestics with estimated 14-15% cash weightage, and c) Overall portfolio bias more defensive than at January 2009. Within portfolios, Foreigners are positioning less defensively than domestics in Jan-Mar 2009 quarter.

■ Sector Positioning — Financials and Industrials are key Overweights with foreigners and domestics. Energy (Reliance effect) and IT are consensus Underweights. Domestics are significantly Overweight Consumer Staples and foreigners are Overweight Telecom (Bharti effect). Relatively few changes in sector positioning in Jan-Mar 2009, although significant outperformance in beta sectors/stocks in Apr- May 2009 suggests the current quarter should see significant portfolio o re-casts.

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