Institutional investors see a buying opportunity in the Clinton administration's wide-ranging sanctions on India.
While emerging markets specialists doubt there will be much of a long-term effect, the volatility resulting from the sanctions is likely to rule Indian financial markets in the next several weeks.
Mark Madden, portfolio manager for emerging markets at Pioneer Mutual Funds, Boston, noted that after India carried out the nuclear tests that led to the U.S. sanctions, the Indian stock market sold off and then rebounded. His fund has $20 million invested in India.
"The very fact that the market rebounded suggests the market believes the effect will be moderate," agreed Kevin Buehler, chief operating officer at International Equity Partners, Washington, a private equity asset company focusing on emerging markets.
"The budget, to be released June 1, will have far more of an effect on the financial markets," Mr. Buehler predicted.
Both men view the situation as a buying opportunity.
"We're value-oriented and contrarian investors," Mr. Madden said. "Many investors have pulled out of India. But for us, it's a good time to buy. "
Mr. Buehler took advantage of last week's falling prices to buy for his firm's India Direct Fund. He said investors in the fund had not pulled out, but have remained committed to India.
The nuclear testing and resulting sanctions occurred at a bad time, Mr. Buehler added, because the Indian stock market had been performing well. Year to date, the India Crisil 500 Index is up 9.41% in U.S. dollar terms. The Indian markets were becoming increasingly attractive to international investors, especially those looking for attractive opportunities in Asia, he said.
According to a May 5 report from the Securities and Exchange Board of India, foreign portfolio investment in India is around $9.2 billion. Most of the money is from institutional investors, said Mr. Buehler. He noted there are four closed-end funds that invest in India, but their largest shareholders also are institutions. Direct foreign investment is around $7.1 billion, the SEBI report said.
Mr. Buehler noted a significant domino effect could occur if the sanctions were to last long enough, and the United States began to pressure multilateral organizations such as the International Finance Corp. against investing in India. He said the IFC had invested $7.5 million in the India Direct Fund, which his firm started in 1996. "The IFC was one of the first investors in the $44 million fund, and a catalyst for other investors," he said.
The big question now, experts say, is if and when India will decide to participate in the Comprehensive Test Ban Treaty.
"If they have finished their testing and sign the treaty, multilateral organizations will continue to support India," Mr. Buehler said.
Most observers expect India to sign the treaty; they believe India performed the tests to be considered a nuclear power.
"In India, everyone is happy about the tests," said Pioneer's Mr. Madden. "They always complained they were ignored because they were poor, and now, because of the tests and the sanctions, people are paying attention to them. Our staff in India tell us the cabinet members were passing out candy on the day of the tests, to celebrate.
"Since the global community has not come out with its own sanctions against India, and is not expected to, the whole business is likely to blow over," he said.
Indeed, International Equity Partners is about to launch the Indian Equities Fund, an open-end fund targeted at $40 million that will invest in Indian equities.
"We had scheduled the first U.S. road show for June 1, right after the elections (in India), and have no plans to cancel," Mr. Buehler said.