Foreign investors might pull out from emerging markets (EMs), anticipating further hikes by the US Fed in the days to come as the most important factor to look out ahead is further devaluation of yuan, says Saurabh Mukherjea, CEO, Institutional Equities at Ambit Capital, in an interview with Pavan Burugula.
How do you think Indian markets would react in case of an interest rate hike by US Fed?
To begin with, there is a 30-60% chance that the US Fed will up the interest rate in the coming meet, but the quantum of hike is likely to be small. Hence, it is unlikely spook the Indian markets as such. However, foreign investors might pull out from the emerging markets, anticipating further hikes by the US Fed in the days to come. The most important factor to look out for in such scenario would be the reaction of China.
The Central bank of China might go ahead and devalue the yuan again. Such a devaluation will hit the Indian
markets.
What would be the impact of slowdown in China on Indian markets?
The rise of EM equity as an asset class around 12-13 years ago was on the back of a rising China. Most emerging markets have witnessed good inflows from foreign investors over the last 10-12 years. It follows, therefore, that concerns about China can impact the perception of investors about the very concept of EM equity as an asset class.
Most emerging markets have started to witness outflow of foreign funds already. This trend is expected to continue in the days to come and India is unlikely to ride this out without getting affected.
However, the macro economic environment in the country seems to be positive; hence, India has a chance to bounce back over the medium-long run but such process will take time. Meanwhile, India will continue to be under the pressure of the selling by FPIs in EMs.
What are the concerns of your foreign clients about India?
If we look at our market’s history, FPIs didn’t invest in India due to the “overweight” status that numerous brokerages had conferred India or due to the country’s GDP growth rate.
Foreign investors are more concerned about stock-specific investment opportunities than about our macro-economic positioning. Our clients these days are concerned about issues like overcapacity in most sectors of the Indian economy, about the state of the Indian banking system and about the lack of aggregate demand in India. There is also disappointment that the land-acquisition amendment did not see the light of day — instead, states will pass their own laws, which are unlikely to be as effective as a union law.
What do you think are the major challenges for Indian economy in the near term?
Our biggest worry is about the health of the Indian banks. The proportion of stressed assets is already more than 11%. Further, the capital required to recapitalise the banks is by our estimation at least five times the quantum recently promised by the government. Another important factor is the slump in the real estate sector. The sector accounts to 30% of India’s capital expenditure. As per NSSO data, real estate accounts to one-third of non-agricultural jobs in the country… hence, any decline in the sector would affect the economy and rural demand.
Overcapacity is yet another challenge. The problem is prevalent in almost all the sectors. Further, revival of our economy is linked with improvement in capital expenditure. Our economy is right now in a transition phase. Till a year ago, we were a subsidy driven demand economy. Post the emergence of the NDA government, subsidies have been cut. Whilst this would certainly help the economy in the long run, in the near-term it would hit demand.
What would be the role of domestic investors in such a scenario?
Domestic institution investors (DIIs) have been actively investing the markets over the past year even at times when FPIs were selling their stakes. However, this is unlikely to go on for a long time as any downturn in the market would also impact the domestic investors.
But there is no doubt that DIIs have started to play a more important role in the Indian markets than they did in the years from 2010 to 2014. In the years to come, domestic institutions are likely to grow in size and India might turn into a domestic investor driven economy. For now, domestic investors don’t have enough muscle to absorb the FPI selling.
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