 "FIIs still a very dominant force in our markets: Pratik Gupta")
In case of a broad-based emerging market sell-off, India cannot be completely insulated, says Pratik Gupta, managing director and head of equities, Deutsche Bank Group India. In an interview with Samie Modak, Gupta says interest rate cuts by the Reserve Bank of India (RBI) and an uptick in the government’s capital expenditure will be key drivers for the Indian market. Excerpts:
The US Federal Reserve has kept rates unchanged. Do you think that is positive for emerging markets?
It isn’t sustainable. The Fed statement indicated concern over emerging markets (EMs), and they have only pushed back their initial rate rise, not said it’s off the table completely.
More than the Fed rate increase, it’s worry over how China deals with its economic slowdown and capital outflows and the risk of another round of EM currency sell-off that’s worrying global investors. The simultaneous combination of structural commodity deflation, sharp compression in global trade growth, deep EM currency depreciation and the large dollarisation of EM debt has increased the risk of an EM contagion. The Fed rate rise will likely worsen the outlook for commodity-linked, export-oriented EMs not just in Asia, but also in Brazil and Russia.
The Indian market has rebounded from this year’s lows. Do you think we can retest those lows?
While India is strongly differentiated on macroeconomic health, with far lower fragilities than most of its EM peers, unfortunately, it might not be completely insulated in the event of a broad-based EM sell-off contagion (not our base-case scenario). In case global EM funds face large redemptions, it will be difficult to see India standing alone. Foreign institutional investors (FIIs) are still a very dominant force in our markets, and while domestic investors have been buying equities, it will likely not be enough to offset the FII outflow that might be seen in the short term in that scenario.
How should investors play the market? Is it the right time to buy stocks, as the market has come off its highs?
Given global EM-related uncertainties, we are cautious on the near-term outlook and recommend a defensive approach by buying (a) dollar proxies such as information technology and pharma stocks (b) urban consumption plays, given the falling inflation and commodity prices, (c) public investment plays, given the rising government capex, and (d) utilities as safe haven plays. However, any-EM related outflow is likely to be temporary, considering the strong fundamental outlook for our economy and I expect India to continue its outperformance compared to most other EMs over the long term and, therefore, attract FII flows.
So, if you’re a genuinely long-term investor in India who’s not worried about any marked-to-market losses in your portfolio in the short term, now is a good time to buy.
What are the next big drivers for the market? Is there scope for RBI to ease rates at its meeting later this month?
Apart from some stability in EM currencies, among the domestic factors, a key driver will be interest rate cuts through the next 12-18 months. We expect RBI to cut policy rates by 25 basis points at its September 29 policy meeting. Importantly, market lending rates have also started declining. Another major driver in the medium term is the continuing pick-up in the capital expenditure of the government, public sector undertakings and multinational corporations; we’ve seen a sharp pick-up in roads already, and we expect railways and defence to follow. Lower commodity prices will also help many user industries in India through better volumes and/or margins. Also, if the goods and services Bill and the bankruptcy code are approved quickly and if the Bharatiya Janata Party wins in Bihar, it’ll be seen positively by most investors.
The US Federal Reserve has kept rates unchanged. Do you think that is positive for emerging markets?
It isn’t sustainable. The Fed statement indicated concern over emerging markets (EMs), and they have only pushed back their initial rate rise, not said it’s off the table completely.
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Given the uncertainty over the Fed’s rate increase and weakness in the global economy, will the market continue to remain volatile?
More than the Fed rate increase, it’s worry over how China deals with its economic slowdown and capital outflows and the risk of another round of EM currency sell-off that’s worrying global investors. The simultaneous combination of structural commodity deflation, sharp compression in global trade growth, deep EM currency depreciation and the large dollarisation of EM debt has increased the risk of an EM contagion. The Fed rate rise will likely worsen the outlook for commodity-linked, export-oriented EMs not just in Asia, but also in Brazil and Russia.
The Indian market has rebounded from this year’s lows. Do you think we can retest those lows?
While India is strongly differentiated on macroeconomic health, with far lower fragilities than most of its EM peers, unfortunately, it might not be completely insulated in the event of a broad-based EM sell-off contagion (not our base-case scenario). In case global EM funds face large redemptions, it will be difficult to see India standing alone. Foreign institutional investors (FIIs) are still a very dominant force in our markets, and while domestic investors have been buying equities, it will likely not be enough to offset the FII outflow that might be seen in the short term in that scenario.
How should investors play the market? Is it the right time to buy stocks, as the market has come off its highs?
Given global EM-related uncertainties, we are cautious on the near-term outlook and recommend a defensive approach by buying (a) dollar proxies such as information technology and pharma stocks (b) urban consumption plays, given the falling inflation and commodity prices, (c) public investment plays, given the rising government capex, and (d) utilities as safe haven plays. However, any-EM related outflow is likely to be temporary, considering the strong fundamental outlook for our economy and I expect India to continue its outperformance compared to most other EMs over the long term and, therefore, attract FII flows.
So, if you’re a genuinely long-term investor in India who’s not worried about any marked-to-market losses in your portfolio in the short term, now is a good time to buy.
What are the next big drivers for the market? Is there scope for RBI to ease rates at its meeting later this month?
Apart from some stability in EM currencies, among the domestic factors, a key driver will be interest rate cuts through the next 12-18 months. We expect RBI to cut policy rates by 25 basis points at its September 29 policy meeting. Importantly, market lending rates have also started declining. Another major driver in the medium term is the continuing pick-up in the capital expenditure of the government, public sector undertakings and multinational corporations; we’ve seen a sharp pick-up in roads already, and we expect railways and defence to follow. Lower commodity prices will also help many user industries in India through better volumes and/or margins. Also, if the goods and services Bill and the bankruptcy code are approved quickly and if the Bharatiya Janata Party wins in Bihar, it’ll be seen positively by most investors.