Sovereign wealth funds have increased their holdings in the Indian stock market since March, contrary to expectations that they would head for the exit amid the coronavirus (Covid-19) crisis.
They have a higher share among foreign investors in Indian equities now than in the first three months of the year, before Covid-19 became widespread. Sovereign wealth funds typically look to invest money gained from natural resources to use during periods of downturn. Many of the largest funds are from countries which have large crude oil reserves. Crude oil prices crashed and demand fell as many economies locked down to stop the spread of the coronavirus. This was expected to result in funds liquidating holdings to meet the parent country’s financial needs which depend on oil sales.
Sovereign wealth funds’ India equity assets under custody were Rs 1.34 trillion at the end of March. They rose to Rs 1.88 trillion at the end of August. The August figure is the highest for the year so far, higher even than January (Rs 1.83 trillion) and February (Rs 1.73 trillion). The government instituted a lockdown to control the pandemic in March. Sovereign funds’ share of total foreign portfolio investments has risen in the months since to 6.4 per cent August. The January figure was 5.94 per cent.
Some of this may have been aided by large investments in individual companies. For example, Reliance Industries announced Saudi Arabia’s Public Investment Fund investing Rs 11,367 crore in Jio Platforms for a 2.32 per cent stake.
The bounce back in oil prices and availability of liquidity globally are some of the factors that may have eased the selling pressure that could have otherwise emerged, suggested UR Bhat, director at Dalton Capital Advisors (India). The immediate outlook does not point towards an exodus, according to him.
“Oil prices have recovered dramatically,” he pointed out.
Brent crude prices had fallen below $16 per barrel in April. It was trading around $40 on Tuesday.
Deven Choksey, managing director of KRChoksey Investment Managers, said that central banks and governments had been making available large amounts of money in a bid to stimulate the global economy. This made the prospects for significant outflows from foreign investors unlikely as easy liquidity conditions were expected to persist for some time.
“They are unlikely to take the money back,” he said.
Sovereign wealth funds may look inwards even as they capitalise on attractive valuations brought on by the Covid-19 pandemic in foreign markets, according to an August 7, 2020 paper entitled, ‘Sovereign Wealth Funds and the Covid-19 shock: Economic and Financial Resilience in Resource-Rich Countries’ from authors including Bocconi University’s Bernardo Bortolotti, Veljko Fotak and Chloe Hogg from the London School of Economics.
“Asset allocations will likely shift..(towards)...domestic assets, but portfolio rebalancing will also entail that investment opportunities will be seized in global equity markets, especially in the most severely damaged economies where assets can be bought at the most discounted prices,” it said.
“Importantly, the survival and future relevance of SWFs in their domestic economies will depend upon their countries’ resilience in the face of the...(Covid-19 pandemic)...shock and the extent to which their sovereign assets are used as buffers,” it added.