COVID India fallout: Second wave erodes equity fund inflows but rebound possible, says expert

The massive surge in COVID-19 cases during the second wave of the pandemic in India is alarming foreign institutional investors and has knocked off inflow of equity funds to the country, said Cameron Brandt, director of research at EPFR Global in an interview to the Business Standard.

"The second wave of COVID-19 has knocked a modest rebound inflow of equity funds to India on the head. Mutual fund investors were already treating India's reflation. For example, the first wave peaked in mid-September but India equity funds did not see flow rebound until January 2021. But the most recent International Monetary Fund forecast predicts double-digit economic growth this year, so the potential for a rebound in foreign interest is still there,"  said Brandt in the interview.

Explaining about how big money has moved across geographies and asset classes over the past few months during the COVID-19 pandemic, Brandt said Asia was an attractive market between December 2020 and the end of January 2021, pulled $55 billion from EPFR-tracked European and North American equity fund groups, while steering over $18 billion into the Asia Pacific and Asia ex-Japan equity funds. But after the fiscal stimulus in the US and its expected impact on economic growth, the scenario has changed.

At the beginning of the second quarter, $36 billion flowed into North American and European equity funds. And this has led to a dramatic re-rating of the US at the expense of other markets, he added.

Regarding the outflow in gold exchange-traded funds and risk-reward equations in debt funds, he said outflows in gold are a reflection of the scepticism surrounding the Fed's inflation narrative. For debt funds, the risk-reward equation looks unfavourable, except when the equation's results are compared with those of the alternatives.

About the commodity market, he said the latest inflow in commodity funds was the 26th in the past 28 weeks. A combination of rebounding economic activity and a tight supply picture has caused this inflow.

For the S&P Dow Jones introduction of cryptocurrency indices, he mentioned that even though there is a big inflow in these funds they remain a small part of the overall mutual fund industry.