The Indian markets have run up significantly led by optimism of both the domestic and foreign investors. What led to this optimism of foreign investors and can this sustain or is it short term money which is driving the Indices? Cameron Brandt, Director Research, EPFR speaks to Jitendra Kumar Gupta about the factors involved. Edited excerpts:
What is the consensus among the foreign investors about the outcome of the elections in India? How are they preferring to play before and after the elections?
There is a general consensus that the BJP will be in the driver's seat following the election. But most expect they'll need some degree of support from smaller parties to form a government. There is the expectation that whoever wins will have made promises of significant economic reform and some foreign money has moved in to take advantage of any reform rally. But how long that money stays will depend on the mandate the winner gets and foreign perceptions of their ability to implement that mandate.
Do you think a clear mandate to BJP could have its implications on the flows? What is your assessment?
If the BJP has a working majority I think investors will take another look at India, since the magnitude of victory needed for that to happen will signal a real appetite on the part of India's electorate for a different economic direction. Coalitions governments and economic reforms are usually uneasy partners.
Foreign investors have grabbed Indian equity over the last few days. What does it signal? Is this long term money?
I doubt it, though some of it appears to be driven by the attractive valuations of Indian blue-chips in dollar and euro terms. But most of it seems to be aimed at capturing any pre- or post-election 'bounce' and is coming from sources - hedge funds, SWFs, rich individuals - that we don't capture.
Flows from the US and European Equity Funds that we track to India since 2012 - in both cases the longer-term, actively managed funds are pulling out more money than the ETFs which tend to be the vehicles favored by the shorter term, 'tactical' investors.
What is your assessment of the Indian market vis-a-vis other emerging markets like China?
If China's credit issues really start to bite I think that will generate headwinds for all emerging markets. But, in relative terms, India will fare better than most as it is not as exposed to export performance as many of its regional peers. Slower Chinese growth is also likely to keep a lid on oil prices, a significant factor when it comes to the size of India's current account deficit.
Are investors not worried at this point in time about the growth and rupee volatility?
Again, given the issues facing most emerging markets India's situation is - relatively speaking - not sounding any alarm bells. India's policy responses over the past nine months have also been reasonably effective in terms of stabilising the rupee and tackling inflation. And RBI Chief Raghuram Rajan's stock with the foreign financial community remains high.
How do you think the next 8-12 months will pan out for Indian equity markets in terms of foreign inflows?
Investors are definitely taking a more country-by-country approach at the moment, and a market that offers a credible reform story is likely to see stronger foreign capital flows. A lot will depend on implementation: if India's new government balks at reforming the economy then money that flowed in ahead of the election will be quick to leave.
What is your reading of global developments such as easing of tapering and return of global growth particularly in the US and Europe?
Growth is still fragile, especially in Europe where deflation could become a real issue by the end of the year, and there is a lot of political risk at the moment that ranges from events in the Ukraine to the tensions between the countries bordering the China Sea. So the chances of a consensus-altering shock, be it economic or political, are high.
Importantly how are foreign investors reading these trends? Can they pull out of the Indian markets and the emerging markets in the months to come?
From where we sit it appears that investors have moved pre-emptively over the past 10 months when it comes to emerging markets, with steady redemptions from Emerging Markets Equity Funds - especially those with broad, general mandates - and a greater focus on individual markets.
In India, where are the foreign investors investing in terms of sectors etc and what that they prefer at this point in time?
In absolute terms the Asia-dedicated funds we track have the greatest exposure to financials, IT and consumer plays. The former, along with allocations for the Energy and Materials sectors, have slid during the past six months while both Consumer Discretionary and Staples weightings have risen, as have those for IT - a plus for India - and Healthcare.
What is the consensus among the foreign investors about the outcome of the elections in India? How are they preferring to play before and after the elections?
There is a general consensus that the BJP will be in the driver's seat following the election. But most expect they'll need some degree of support from smaller parties to form a government. There is the expectation that whoever wins will have made promises of significant economic reform and some foreign money has moved in to take advantage of any reform rally. But how long that money stays will depend on the mandate the winner gets and foreign perceptions of their ability to implement that mandate.
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If the BJP has a working majority I think investors will take another look at India, since the magnitude of victory needed for that to happen will signal a real appetite on the part of India's electorate for a different economic direction. Coalitions governments and economic reforms are usually uneasy partners.
Foreign investors have grabbed Indian equity over the last few days. What does it signal? Is this long term money?
I doubt it, though some of it appears to be driven by the attractive valuations of Indian blue-chips in dollar and euro terms. But most of it seems to be aimed at capturing any pre- or post-election 'bounce' and is coming from sources - hedge funds, SWFs, rich individuals - that we don't capture.
Flows from the US and European Equity Funds that we track to India since 2012 - in both cases the longer-term, actively managed funds are pulling out more money than the ETFs which tend to be the vehicles favored by the shorter term, 'tactical' investors.
What is your assessment of the Indian market vis-a-vis other emerging markets like China?
If China's credit issues really start to bite I think that will generate headwinds for all emerging markets. But, in relative terms, India will fare better than most as it is not as exposed to export performance as many of its regional peers. Slower Chinese growth is also likely to keep a lid on oil prices, a significant factor when it comes to the size of India's current account deficit.
Are investors not worried at this point in time about the growth and rupee volatility?
Again, given the issues facing most emerging markets India's situation is - relatively speaking - not sounding any alarm bells. India's policy responses over the past nine months have also been reasonably effective in terms of stabilising the rupee and tackling inflation. And RBI Chief Raghuram Rajan's stock with the foreign financial community remains high.
How do you think the next 8-12 months will pan out for Indian equity markets in terms of foreign inflows?
Investors are definitely taking a more country-by-country approach at the moment, and a market that offers a credible reform story is likely to see stronger foreign capital flows. A lot will depend on implementation: if India's new government balks at reforming the economy then money that flowed in ahead of the election will be quick to leave.
What is your reading of global developments such as easing of tapering and return of global growth particularly in the US and Europe?
Growth is still fragile, especially in Europe where deflation could become a real issue by the end of the year, and there is a lot of political risk at the moment that ranges from events in the Ukraine to the tensions between the countries bordering the China Sea. So the chances of a consensus-altering shock, be it economic or political, are high.
Importantly how are foreign investors reading these trends? Can they pull out of the Indian markets and the emerging markets in the months to come?
From where we sit it appears that investors have moved pre-emptively over the past 10 months when it comes to emerging markets, with steady redemptions from Emerging Markets Equity Funds - especially those with broad, general mandates - and a greater focus on individual markets.
In India, where are the foreign investors investing in terms of sectors etc and what that they prefer at this point in time?
In absolute terms the Asia-dedicated funds we track have the greatest exposure to financials, IT and consumer plays. The former, along with allocations for the Energy and Materials sectors, have slid during the past six months while both Consumer Discretionary and Staples weightings have risen, as have those for IT - a plus for India - and Healthcare.