ASIA: Offshore funds dump blue chips as Covid-19 fears plague investors.

As published on economictimes.indiatimes.com, Friday 20 March, 2020.

Mumbai: Offshore funds investing in India have been forced to liquidate some of their top bluechip holdings in the past month on account of stoppage of fresh inflows and increased redemptions by clients. The 34% fall in the stock market in line with the meltdown in global markets on worries that the disruptions caused by Covid-19 would lead to a global recession has led to investors making fresh investments in these funds.

In the past fortnight, several limited partners (LPs) of hedge funds have gone back on their earlier investment commitments to the funds, said people with the direct knowledge of the development. With the market slide showing no signs of slowing, some of these funds have begun restrictions on redemptions.

“There are fears about the LPs of these funds defaulting on their commitments. Also, some of these funds have already and others are considering imposing restrictions on redemptions,” said Siddharth Shah, partner, Khaitan & Co, a law firm that services foreign investors.

Since February 19, foreign portfolio investors (FPIs) have net sold an unprecedented Rs 57,000 crore in Indian stocks. Most of the big-ticket foreign funds are publicly pooled funds such as mutual funds or insurance funds.

“Investors are going back on their commitments, putting the funds in a very difficult situation since the allocations were planned before the outbreak,” said a senior executive of a leading broker, which services foreign investors. “Funds have to recalibrate their investment strategies based on the new reality.”

In the recent past, foreign funds had stepped in during declines. However, this time, few are in a position to do so as investors are rushing to hold cash.

Placing restrictions on redemptions happens in extreme instances if the cash reserves that these funds have for payout obligations may be insufficient if there are large redemptions on a single day, say experts.

“Restrictions on redemptions is quite a standard clause in the fund documents; that the board of the fund may withhold redemption request of the investor as per the sole discretion of the board,” said Neha Malviya, director, Wilson Financial Services. “The funds have to tread cautiously in this choppy market scenario.”

The panic initially started from Asian funds, with flows from China, South Korea and Japan into Indian stocks slowing, impacting 10-15% of the total inflows. Now, the aversion has spread to US-based funds, said custodians.

“While we are witnessing material selloffs in the markets at this time, from our discussions we gather that investors are closely monitoring the Covid-19 situation, particularly in the US,” said Sriram Krishnan, head of securities services, Deutsche Bank. “Given how China and South Korea have responded, we can expect to see a rebound upon good news from the US and other key markets.”

Market participants expect the mood at foreign trading desks to remain gloomy in the near future.