Foreign money is chasing the reform story: Cameron Brandt

Interview with director of research, EPFR Global

The recent liquidity-driven rally in the Indian markets has mostly been driven by domestic flows even as the foreign institutional investors have been recalibrating their strategy. CAMERON BRANDT, director of research, EPFR Global tells Puneet Wadhwa that lack of earnings growth and flat private investment are key concerns that FIIs have as regards the Indian markets. Edited excerpts:

What is your assessment of the fund flows this far in calendar year 2017 (CY17) across developed and emerging markets? Which regions have seen a pull out and in which regions has this money been deployed in?

Of the themes that were expected to drive markets this year, the one with perhaps the greatest traction is the synchronised global recovery - Global Equity and Bond and Global Emerging Markets (GEM) Equity and Bond Funds have enjoyed consistent inflows. With this preference for diversified exposure, none of the regional fund groups have shone, though at the country level the perception that India's reform story has gotten its second wind has attracted plenty of fresh money to India Equity and Bond Funds.

Do you think the US Federal Reserve (US Fed) will unwind its balance-sheet in 2017? How will this impact flows into the emerging market?

I do expect the US Fed to at least outline its timetable when it meets later this month, but the process itself is likely to proceed at an extremely cautious pace and has been well flagged. So I am not expecting a big shift away from EM Funds.

What are the biggest risks to the global financial markets right now, and what is the probability you attach to these events materialising over the next 6 - 12 months?

US overreaction to North Korea's provocations, European Central Bank (ECB) moves too aggressively to tighten monetary policy in the Eurozone, a major credit event in China are some of the key events pose a risk to the global financial market stability.

How long do you think the global central banks will remain accommodative and continue to pump in liquidity?

Certainly another 18 months. But all of the major ones clearly think - and have for some time - that they've done as much as they can and that fiscal policy needed to drive further improvements in the global economy.

Indian Markets have been mostly supported by domestic flows off-late. Do you see the trend continuing? What's keeping FIIs from investing more money in India?

Foreign money is chasing the reform story, and it is very much a case of 'show me some progress'. The goods and services tax (GST) reform has taken place so foreign investors need another reason to increase their allocation to India.

How does India appear as an investment destination now given the global developments? Are the markets overheated in the absence of earnings growth?

India frequently does better when EMs as a whole are not popular because of its limited exposure to foreign trade and strong domestic demand story. EMs are still quite popular and valuations are cheaper elsewhere. The issue of earnings growth, and flat private investment, are concerns in the Indian context.

How is the breakup of inflows into India looking like? Which sectors have been the top priority and which ones have been laggards?

India's general popularity has seen all sectors attract larger inflows, with Financials and Utilities seeing the most striking increases compared to last year.