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Informist, Thursday, Aug 8, 2024

 

MUMBAI – The unwinding of the yen carry trade is a real threat for India and if the unwinding accelerates, "the impact on markets could be a function of (the) rate at which supply gets absorbed by domestic investors", Elara Capital said in a research report today. India's yen denominated assets have risen 251% to $21 bln from $6 bln in January 2023, the report said. Of these investments, Elara said it could identify industry-wise exposure only for investments adding up to $14 bln.

 

The three sectors with the largest yen-denominated inflows are banks, software and services, and capital goods, the report said. Automobiles and components, energy, and materials are the other three sectors where yen-denominated investments total over $1 bln, the report said. The sectors with the highest unrealised profit on investments are retailing, with a gain of 156% on a low investment base of $195 mln, consumer services with a gain of 141% on a low investment base of $154 mln, and telecom services with a gain of 115% on an investment of $384 mln, the report said.

 

Of the sectors with investments of over $1 bln, capital goods provided the highest return of 107% on investments of $1.46 bln, the report said. The automobiles and components sector provided second-highest returns of 74% on investments of $1.26 bln, Elara said. Investments in the energy sector provided the third-highest return of 56% on an investment of $1.03 bln.

 

While the report did not say so, these sectors would be hit the worst in case of a sharp or quick unwinding of the yen carry trade investments in India. Of these, the capital goods sector stands out as it is among the top sectors both in terms of returns generated and the current value of yen-denominated investments.

 

If the yen carry trade unwinding continues, the consumer durables, insurance, food-and-beverages and tobacco, and household and personal products sectors could be least affected as these have lower yen-denominated investments, as per the report. 

 

Among other sectors with sizeable yen-denominated investments, bank stocks have $2.56 bln of such investments and these signify a 9% profit for their investors, the report said. Inflows into these stocks since January 2023 amounted to $1.29 bln, according to the report. The software and services sector has total yen-denominated investments of $1.56 bln and the report pegged the profit expected on these investments at 34%. Inflows into these stocks since January 2023 were $724 mln. The capital goods sector has total yen-denominated investments of $1.46 bln, unrealised profits of 107%, and has seen inflows of $537 mln since January 2023, the report said.

 

The automobiles and components sector has yen-denominated investments of $1.26 bln and the yet-to-be-realised profit on these investments is 74%, the report said. The inflows into this sector since January 2023 total $519 mln. Energy stocks have received yen-denominated investments of $1.03 bln and the yet-to-be-realised profit on these investments is 56%, the report said. The inflows into this sector since January 2023 were $446 mln. The materials sector saw yen-denominated investments of $1.01 bln and the yet-to-be-realised profit on these investments is 33%, the report said. The inflows into this sector were $485 mln. 

 

Elara said the previous leg of the yen carry trade started in March 2016 and ended in January 2018. This phase of the carry trade triggered a price action that expanded mutual fund flows in India, Elara said. After this leg, the unwinding of the carry trade lasted for three years starting 2017, the report said. During this unwinding phase, which accelerated in 2018, "domestic MF (mutual fund) flows remained positive... although momentum had slowed down".

 

"However, the trade started unwinding in 2018 and (the unwinding) lasted for more than 2 years," the report said. "In this period, we saw a big destruction of breadth in market (largely in mid- and small-cap space)," Elara said. Just as yen-denominated investments in Indian equities have risen 3.5 times in the current phase of the yen carry trade, such investments in the previous leg of the carry trade, in 2016-18, had also risen three times, the report noted.

 

Elara Capital suggested monitoring the movement of rupee-yen could help understand the direction of trade. "If JPY continues to appreciate against INR, (it) could be (an) indication of (a) bigger unwind," it said in the report. Although the report cautioned against the impact due to further unwinding of the yen carry trade, it also mentioned that "domestic flows never turned negative" in the previous leg of unwinding in 2017-20.

 

Last week, the yen appreciated after the Bank of Japan increased its benchmark interest rate to 0.25% on July 31 after years of negative interest rates. The BoJ also announced it would reduce its bond purchases, which effectively tightened monetary policy. This appreciation of the yen led investors to rush to square off or unwind the yen carry trade to prevent further contraction in their gains.

 

Yen-denominated inflows into global equities since January 2023 were $45 bln, Elara said. Yen-denominated global equity assets outside Japan grew 75%, or by $150 bln to $350 bln, since January 2023. About 33% of the total yen inflows, or $15 bln, was in US funds, $10.3 bln in Indian funds, and $20 bln in global funds. Of the $10.3 bln that went into Indian funds, $2.7 bln has gone into mid-cap and small-cap funds, whereas $7.6 bln has gone to large-cap funds, the report said. Almost 25% of the total yen inflow into India has gone to mid-cap funds, the report said.

 

"India is the only market where a big portion of yen-denominated inflows have been in mid-cap funds," the report said. The yen inflows which began in April 2023 peaked in September 2023, Elara said. Mid-cap funds rallied by 42% in this period "without any strong correction", the report noted. Since September 2023, yen-denominated inflows have shifted to large-cap funds, the report added.

 

Following is the sector-wise breakup of yen-denominated flows and investments in India:

 

Sector	Flow since Jan '23 ($ mln)	Assets in Jan '23 ($ mln)	Current assets ($ mln)	Change in assets	Expected profit
Banks	1290	1155	2560	1406	9%
Software & Services	724	597	1564	967	34%
Capital Goods	537	353	1463	1110	107%
Automobiles & Components	519	361	1264	902	74%
Energy	446	333	1028	695	56%
Materials	485	365	1010	645	33%
Diversified Financials	351	200	835	634	81%
Pharmaceutical & Biotechnology	307	210	673	463	51%
Food Beverage & Tobacco	310	217	627	410	32%
Utilities	218	151	546	395	81%
Household & Personal Products	241	199	526	327	36%
Telecom Services	129	105	384	279	115%
Consumer Durables & Apparels	151	113	335	222	47%
Insurance	116	99	205	107	-8%
Real Estate	83	51	200	149	79%
Retailing	64	31	195	163	156%
Health Care Equipment & Services	80	62	171	109	36%
Transportation	61	49	168	119	94%
Consumer Services	50	35	154	120	141%

End

US$1 = 83.96 rupees

 

Reported by Aman Aryan and Arunima Pal

Edited by Rajeev Pai

 

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