Foreign investors have been surprised by the strength in the Indian market, said H Nemkumar, head of institutional equities at IIFL, adding that many emerging markets are getting hurt with overweight on China.
"Valuations have expanded in the face of turmoil in emerging markets and as well as weakness in rupee, Nemkumar said.
India, traditionally for foreigners, has been a bottom-up stock market and buying good quality stocks means that you have to pay up to own them because over the longer term it has panned out well, he said.
What is the mood among foreign portfolio investors (FPIs) with regards to investment in Indian equities? They have mostly been seller so far this year. Do you think that trend would continue?
Foreigners, in general, have been very surprised by the big strength in the Indian market and that valuations have expanded in the face of turmoil in emerging markets and as well as weakness in rupee.
This is the first time where we are seeing rupee at a new low and market at a new high. So it surprised people but a lot of emerging market investors are also getting hurt with their overweight position on China. Most investors have neutral, some were underweight, of course, as well.
So the overweight position in China is hurting them a lot, but in India, there is a general consensus that growth is now coming back, earnings growth momentum in the next few years is likely to remain strong and valuations have been rich in India.
India, traditionally for foreigners, has been a bottom-up stock market and buying good quality stocks means that you have to pay up to own them because over the longer term it has panned out well. So the value investors are really struggling because for them justifying valuations at current levels is a challenge but a lot of value investors who like good bottom-up structural growth stories, they are happy to stay put.
What about the trend of reversal of Foreign Institution Investor (FII) outflows? We have seen that being very steady so far this year. Is that likely to reverse anytime soon?
I think in the short-term, one should not expect flows to come back given the worries centering on the emerging markets. Some of the global guys get enthused about one stock here or there but I do not think that the flows from FIIs are going to turn on the positive side or on the negative side as well.
There will be marginal pluses and minuses. Once this year passes we will be staring at the elections and starting early next year the initial forecast in terms of what the poll outcomes could be the driver but in the near-term, I do not see any big uptick or downtick in terms of flows.
Some bit of selling is not too big; this kind of selling can be easily big absorbed by the market.
Is the mood very different among domestic funds now? Are we expecting continued domestic inflows into equities through the course of 2018?
The flows in the domestic mutual funds, my belief is that they will remain robust. We have seen some bit of softening in July.
I have not yet seen the numbers for August but my belief is that flows into domestic mutual funds will remain robust. There are a lot of flows that are coming into Alternative Investment Funds (AIF) as well. So that will be the mainstay of the market.
Within the domestic funds what we are seeing is that there are some fund managers who are cautious given the big valuation expansion that has happened, but every fund manager has a different style.
So as long as money is coming in, it finds the way either in primary or the secondary market. So I think that the domestic flows will be supportive of the market as it has been in the recent past.
Some thoughts on the macros, we have seen 8.2 percent GDP growth number that was fairly robust. How do you react to that and what is your expectation from corporate earnings?
One thing is for sure that consumption momentum is really strong. It is strong because of a variety of reasons. One, goods and services tax (GST) rates have been brought down. Second, financing is much more easily available because you now have a credit history. The third thing is that the competitive environment is driving down prices, innovation is driving down prices which is driving up affordability.
So despite all the concerns on lack of enough job creation etc... or even farm stress, what we are seeing is that there are other drivers for consumption growth.
So you look across FMCG and consumer durables, we are seeing a sustained growth of pick up that is happening. I think in this cycle at this stage, my belief is that consumption will continue to drive GDP growth and investment cycle is still weak.
It may take some time, maybe after the elections when we have better clarity on the new government. You will see the cycle slowly turning.
Is the rupee depreciation on rising oil prices keeping flows away. Where do you see the rupee and Brent heading and what is your take on the twin deficit and the impact that it would eventually have on the equity markets?
It’s very hard to forecast oil prices, so I wouldn’t venture into that, but assuming that the current oil prices are there, we will be marginally short of FY13 peak in terms of the current account deficit that we had because there are several other items where we have seen an acceleration in imports.
Exports is very difficult to forecast at this point in time but I take a lot of comfort from the fact that with this extent of rupee depreciation export growth should see an acceleration. So this is a natural mechanism for rebalancing the current account and therefore at some stage you would actually see exports growth also pick up, but at this point of time, FY19 current account deficit will be very close to the peak that we had in FY13-14.
Also, hopefully, we will see exports revival in FY20 and already we have seen some green shoots there but we need to see a bigger acceleration for the trade deficit to come down.
My hope is that oil prices do not significantly go up from here and if that be the case then assuming that exports revive then probably things should be okay.
Again, forecasting rupee as hard as forecasting oil prices as well but my guess is that a large part of the depreciation or readjustment that need to happen have already happened.
First Published: IST