'Fund managers may wait for poll outcome to raise India exposure'

I think global growth will, for a number of reasons, peak later this year, Cameron Brandt

Rising oil prices and bond markets have unnerved global markets. Cameron Brandt, director of research, EPFR Global, tells Puneet Wadhwa investors have been focusing on China and Japan this year as they try to benefit from the synchronised global growth story without exposing themselves to uncertain political and regulatory climates in the US and Europe. Edited excerpts:
 
What is your assessment of the fund flows thus far in CY2018?
 
Mutual fund investors have been focusing on Asia’s two biggest markets, China and Japan, so far this year as they try to benefit from the synchronised global growth story without exposing themselves to the uncertain political and regulatory climates in the US and Europe. Japan equity funds recorded their biggest quarterly inflow ever during the first three months of 2018 and China equity funds since the fourth quarter of CY2012. The positive reassessment of China and its economy — and what this means for commodities prices — has provided Latin America with another tailwind, as have reform stories, though flawed, in Brazil, Mexico and Argentina. Latin America equity funds we track have posted inflows in 31 of the past 38 weeks.

 

Your outlook on global bond markets?
 
I think global growth will, for a number of reasons, peak later this year. As a result, I am less convinced than many that the US Fed will hike (interest rates) four times in 2018. I think it will be bumpy at times for emerging market (EM) debt and other asset classes such as high yield bonds, but the pressure will not be as great as some are currently forecasting. The wildcard here for global bond markets are the knock-on effects if a populist coalition does take the helm in Italy and pursues populist economic policies.

 
What is driving foreign investors away from India?
 
Allocations have been falling. We see it as a combination of “what have you done for me lately” on the reform front, reservations about the composition of India’s recent growth (deficits/where’s the domestic CapEx?) and a positive re-rating of alternative Asian markets with China to the fore. Fund managers may wait until they have a clearer fix on the outcome of the next year’s general election before they significantly boost their exposure to India.
 
What are the key risks to the market rally in India?
 
The key risks, at present, include a poor monsoon season and/or oil prices pushing towards $100 that changes the deficit-inflation-interest rate-currency balance in such a way that private consumption and investment suffer.

 
Indian markets have been mostly supported by domestic flows off-late. Do you see this continuing?
 
Yes. An analysis of recent flows by currency show the US and European investors pulling out of India equity funds as the ‘fragile five’ narrative regains some traction. The pace of those redemptions has, however, levelled off for European-domiciled India equity funds. And yen-denominated flows have been positive year-to-date.
 
What is the break-up of inflows into India?
 
Financials and information technology remain the biggest allocations, though the latter’s weightage peaked in the fourth quarter of CY2017 after it almost overtook financials as the biggest single sector allocation. Weight for materials and energy have been rising slowly and steadily, while exposure to industrial plays continues a long-term slide that began in early 2011.

 
Some believe markets are factoring in a 'Modi victory' in the general elections. Do you see a massive reversal in flows in case this is proved wrong?
 
It obviously depends on who wins if Modi doesn’t. Rahul Gandhi's policy pronouncements certainly have echoes of the ‘permit raj’, and if he gains momentum investors will start to take notice. But I think that, for the rest of this year, Modi’s fortunes and those of any serious challengers will take a back seat to the global environment.
 
How big a threat are soaring crude oil prices to emerging market flows?

 
Soaring oil prices and weaker currencies are certainly a threat to some EMs, such as India and Turkey, that import much of the oil they use and run current account deficits. But, higher oil prices also benefit producers. Investors are assigning considerable weight to credible reform stories and to the quality of economic policymaking. As regards India, even if oil prices stay high, sound policymaking and fresh reform initiatives from the Modi administration can – if pursued – go a long way to blunting the impact of higher oil prices.