Thursday, October 14, 2010

Why foreign funds are preferring EM banks?

I was wondering why banks are the first object of desire for foreign funds in the emerging markets. Given the view on the currencies, I expected foreign funds to go after relatively(in currency adjusted terms) cheap EM- hard assets. I did not think banks would be such overwhelming favorites. However, the preference for banks seems to have some logic.

Banks in emerging markets have lower cost of funds as EMs have higher savings. The stress on bank incomes is lower as economy is growing and banks have first claim on the corporate income. Third, despite inflation pressures, FII flows and US FED's near zero interest rates are keeping the interest cost low. This has reduced the probability of defaults for large borrowers. No wonder this is most viable entry point for foreign funds.

Disclaimer
Long SBI