 "Foreign funds are unlikely to exit India: Nobutaka Kitajima")
The markets have been on a downward spiral amid fears of the US Federal Reserve hinting at winding down of the quantitative easing as its economy sputters to life. Nobutaka Kitajima, chief investment officer – equity, LIC Nomura Mutual Fund tells Puneet Wadhwa in an interview that reaction to the statements has been overdone and the current market downturn has punished certain stocks much more than their inherent economic worth and business potential. Excerpts:
What are the chances that the US Federal Reserve (US Fed) may push back the tapering off of quantitative easing? Is the US economic recovery in the US on firm footing? Have the markets over reacted?
Recent comments by the US Fed and economic data from do suggest improvement in the macro economic outlook. Improvement in the housing market is to me one of the strong evidence that the economic recovery is on a sustainable ground.
Time elapsed since the start of the global financial crisis is around six years now, which in itself is quite long and US corporates and individuals had been de-leveraging their balance sheet. The monetary accommodation in the US has been considerable and not normal/unconventional, and the normalisation is bound to happen in due course.
Financial market reaction to the Federal Reserve’s comment appears overdone as the process of normalization (on the monetary policy side) is indicative of a more benign outlook on the real economy.
FOMC has said that it will not raise interest rates before the unemployment rate falls below 6.5% (or the outlook for inflation goes above 2.5%). We are still quite a distance from the both. Ben Bernanke wants to ensure that the US will not suffer from Japan-like deflationary spiral.
Could the developments in Japan, China and the Euro-zone impact this decision?
Among Japan, Europe, and China, the outlook for Chinese economic growth is a worrisome. The government itself is accepting the reality of economic slowdown amid anti-corruption campaign. And aggressive implementation of fiscal/monetary policies is not expected.
It is likely that downward pressure on the economy will become even stronger due to the effects of the recently introduced real estate control measures and strengthened controls on asset management instruments.
As it must be well aware of the limitations of past growth models and their side effects, and the Chinese government going forward is expected to implement policies that focus on long term stable growth.
So, what are the implications of this on emerging markets (EMs), especially India, is also grappling with a widening current account deficit amid sliding rupee? Where does it leave the Reserve Bank of India (RBI) in terms of rate cuts?
Heightened uncertainty due to the potential of the QE withdrawal in the US resulted in outflow of funds from EM, especially fixed income including Indian currency. Sliding rupee will be positive at macro level to correct the imbalances in current account. And a steady depreciation of the currency is expansionary in nature and positive for the real economy in the long run.
However, the RBI may be concerned of very sharp movements on the currency and the potential of capital outflow, and may not want to undertake sharper rate cuts in view of the volatile financial markets.
Do you think that foreign institutional investors’ (FIIs) fascination with India in the emerging market pack may be getting over given the worsening macros?
Reform measures to improve investment environment and their implementation (mechanism to ensure power availability, transparent regulatory regime, etc.), measures to sustain fiscal consolidation (continuation of diesel price hike) may induce higher FII, and help stabilising the currency, along with aggressive monetary easing assuming inflationary pressure continues to subside and the currency stabilises.
The current slowdown has exposed some of the weakness in the system and brought to fore the need to undertake some far reaching reforms. With the government finally beginning to show some resolve in taking some of the much-needed measures, the economic fortunes would see a change for the better in due course.
However, it will take some time for large policy announcements to trickle down to the ground and the government is still largely in governance paralysis, and It would be hard to project that increasing number of new investment projects will be kicked-off given the already-high level of leverage in the corporate sector, though incremental direction being positive. FII interest in India would continue reflecting the underlying growth potential.
Could the developing political landscape drive flows out of India?
The size of capital market is limited in EM, which tends to exaggerate volatility one way or the other. I expect gradual depreciation of Rupee given the inflation differential. Near-term flow of funds depends on the perception of future outlook of investors. Political uncertainties in such places like Turkey, Syria, Brazil, as well as domestic election schedule in India are not helping investor confidence, but these tend to provide interesting entry point.
If the government pursues its new found resolve to improve the macro-economic situation by sustaining fiscal consolidation efforts, improve the supply-side situation in the economy, foreign funds are unlikely to exit India given the inherent growth potential of the country.
In terms of specific sectors and stocks, where do you see some respite from the carnage we may see over the next 6-12 months? What about precious metals?
I feel that the current market downturn has punished certain stocks much more than their inherent economic worth and business potential. Further, the market is not factoring some of the positive measures that the government has undertaken to resolve the economic logjam.
I believe that the companies which focuses on the domestic economy should deliver very good returns, when the cyclical recovery takes root (these have been impacted the most in this downturn and are trading well below their intrinsic value) – financials, telecoms, energy & materials, and consumer discretionary including autos, while the export-oriented sectors like information technology (IT) and healthcare may benefit from a stronger US economy and weaker rupee.
In short, defensive companies have outperformed and are trading at premium for the last several years. We expect a gradual shift to cyclical may occur in the future. As inflationary pressures subside in the next few quarters, we expect the market will start to discount the eventual economic recovery. One might include precious metals among defensives.
Close to 7-lakh equity folios met closures in May – the highest ever monthly closures of equity accounts in the industry's history. How has LIC Nomura MF fared and what is the road ahead for the industry?
The past five years have been extremely difficult for equity investors, when other investment alternatives such as gold have delivered better returns compared to equity. This has led to loss of appeal for equity as an asset class. I believe that we are at or close to the bottom of the economic downturn, and the process of healing has begun. Investors are best advised to stay invested in the stock market and partake in appreciation that is likely to happen over the next few years.
You recently merged five schemes into one. Why? What is the rationale behind such a move?
Though these schemes were different in investment objective, over the years, they were getting overlapped and thus showing similar performance. In order to meet the requirement of today’s investor and give them clear demarcation and good performance, decision of merger was taken. This will help us in identifying the product gap and launch future funds accordingly.
What are the chances that the US Federal Reserve (US Fed) may push back the tapering off of quantitative easing? Is the US economic recovery in the US on firm footing? Have the markets over reacted?
Recent comments by the US Fed and economic data from do suggest improvement in the macro economic outlook. Improvement in the housing market is to me one of the strong evidence that the economic recovery is on a sustainable ground.
Time elapsed since the start of the global financial crisis is around six years now, which in itself is quite long and US corporates and individuals had been de-leveraging their balance sheet. The monetary accommodation in the US has been considerable and not normal/unconventional, and the normalisation is bound to happen in due course.
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Financial market reaction to the Federal Reserve’s comment appears overdone as the process of normalization (on the monetary policy side) is indicative of a more benign outlook on the real economy.
FOMC has said that it will not raise interest rates before the unemployment rate falls below 6.5% (or the outlook for inflation goes above 2.5%). We are still quite a distance from the both. Ben Bernanke wants to ensure that the US will not suffer from Japan-like deflationary spiral.
Could the developments in Japan, China and the Euro-zone impact this decision?
Among Japan, Europe, and China, the outlook for Chinese economic growth is a worrisome. The government itself is accepting the reality of economic slowdown amid anti-corruption campaign. And aggressive implementation of fiscal/monetary policies is not expected.
It is likely that downward pressure on the economy will become even stronger due to the effects of the recently introduced real estate control measures and strengthened controls on asset management instruments.
As it must be well aware of the limitations of past growth models and their side effects, and the Chinese government going forward is expected to implement policies that focus on long term stable growth.
So, what are the implications of this on emerging markets (EMs), especially India, is also grappling with a widening current account deficit amid sliding rupee? Where does it leave the Reserve Bank of India (RBI) in terms of rate cuts?
Heightened uncertainty due to the potential of the QE withdrawal in the US resulted in outflow of funds from EM, especially fixed income including Indian currency. Sliding rupee will be positive at macro level to correct the imbalances in current account. And a steady depreciation of the currency is expansionary in nature and positive for the real economy in the long run.
However, the RBI may be concerned of very sharp movements on the currency and the potential of capital outflow, and may not want to undertake sharper rate cuts in view of the volatile financial markets.
Do you think that foreign institutional investors’ (FIIs) fascination with India in the emerging market pack may be getting over given the worsening macros?
Reform measures to improve investment environment and their implementation (mechanism to ensure power availability, transparent regulatory regime, etc.), measures to sustain fiscal consolidation (continuation of diesel price hike) may induce higher FII, and help stabilising the currency, along with aggressive monetary easing assuming inflationary pressure continues to subside and the currency stabilises.
The current slowdown has exposed some of the weakness in the system and brought to fore the need to undertake some far reaching reforms. With the government finally beginning to show some resolve in taking some of the much-needed measures, the economic fortunes would see a change for the better in due course.
However, it will take some time for large policy announcements to trickle down to the ground and the government is still largely in governance paralysis, and It would be hard to project that increasing number of new investment projects will be kicked-off given the already-high level of leverage in the corporate sector, though incremental direction being positive. FII interest in India would continue reflecting the underlying growth potential.
Could the developing political landscape drive flows out of India?
The size of capital market is limited in EM, which tends to exaggerate volatility one way or the other. I expect gradual depreciation of Rupee given the inflation differential. Near-term flow of funds depends on the perception of future outlook of investors. Political uncertainties in such places like Turkey, Syria, Brazil, as well as domestic election schedule in India are not helping investor confidence, but these tend to provide interesting entry point.
If the government pursues its new found resolve to improve the macro-economic situation by sustaining fiscal consolidation efforts, improve the supply-side situation in the economy, foreign funds are unlikely to exit India given the inherent growth potential of the country.
In terms of specific sectors and stocks, where do you see some respite from the carnage we may see over the next 6-12 months? What about precious metals?
I feel that the current market downturn has punished certain stocks much more than their inherent economic worth and business potential. Further, the market is not factoring some of the positive measures that the government has undertaken to resolve the economic logjam.
I believe that the companies which focuses on the domestic economy should deliver very good returns, when the cyclical recovery takes root (these have been impacted the most in this downturn and are trading well below their intrinsic value) – financials, telecoms, energy & materials, and consumer discretionary including autos, while the export-oriented sectors like information technology (IT) and healthcare may benefit from a stronger US economy and weaker rupee.
In short, defensive companies have outperformed and are trading at premium for the last several years. We expect a gradual shift to cyclical may occur in the future. As inflationary pressures subside in the next few quarters, we expect the market will start to discount the eventual economic recovery. One might include precious metals among defensives.
Close to 7-lakh equity folios met closures in May – the highest ever monthly closures of equity accounts in the industry's history. How has LIC Nomura MF fared and what is the road ahead for the industry?
The past five years have been extremely difficult for equity investors, when other investment alternatives such as gold have delivered better returns compared to equity. This has led to loss of appeal for equity as an asset class. I believe that we are at or close to the bottom of the economic downturn, and the process of healing has begun. Investors are best advised to stay invested in the stock market and partake in appreciation that is likely to happen over the next few years.
You recently merged five schemes into one. Why? What is the rationale behind such a move?
Though these schemes were different in investment objective, over the years, they were getting overlapped and thus showing similar performance. In order to meet the requirement of today’s investor and give them clear demarcation and good performance, decision of merger was taken. This will help us in identifying the product gap and launch future funds accordingly.