 "India could easily see a surge in portfolio capital flows: Cameron Brandt")
After the developments in Greece and China, global equity markets are eyeing the first rate hike by the US Federal Reserve later this year. While the going has so far been good for emerging markets (EM) in terms of fund flows, Cameron Brandt, director of research, EPFR Global, tells Puneet Wadhwa that even if the US Fed ends up with one hike of 0.25 per cent or below, he believes flows for emerging markets equity and bond funds will not be hit that hard. In the Indian context, banks, automobiles and pharmaceutical are some of the sectors that have attracted foreign flows in 2015, he says. Edited excerpts:
What is your assessment of the flows in the past couple of months? Which regions have seen a pullout and in which regions has this money been deployed?
As they did during the first three months of 2015, mutual investors spent April, May and June pumping money into fund groups connected to markets backed by significant quantitative easing (QE) programmes. This preference enabled EPFR Global-tracked Europe Equity Fund flows to push deeper into record setting territory despite the Greek debt crisis taking several turns for the worse and Japan equity funds to record their biggest quarterly inflow since 2Q13 (second quarter of 2013), while Global ex-US Equity Funds, which on average allocate 70 per cent of their portfolios to Japan and Developed Europe, accounted for all of the global equity fund flows for the quarter. Among the few EM country fund groups that fared well in 2Q15 were India equity and bond funds and Thailand bond funds.
Some reports indicate cash levels with fund managers have jumped to the highest level since the Lehman crisis. What is your assessment?
We are not seeing it in the fund groups we track. Although average cash allocations have edged up after bottoming out in the first quarter of 2014 (1Q14) – and spiked in mid-first quarter of 2015 (1Q15) – they are still below Lehman-crisis levels.
Do you expect signs of a reversal or taper in flows from the emerging markets to the developed markets in anticipation of a hike in interest rates by the US Federal Reserve (US Fed)?
If the Fed ends up with one hike of 0.25 per cent - or below, which I think is a possibility – by the year end, then we believe flows for EM equity and bond funds will not be hit that hard.
Do you think the problems in Greece and China have been contained for good or could they resurface going ahead? What are the implications for global fund flows, especially to India in this backdrop?
Certainly not for good. In both cases, I think we’re looking at 18-24 month ‘fixes’. We’re going into the summer holiday season in the US and Europe, and I expect investors will wait until early September to see how the respective ‘solutions’ play out before making significant changes in their allocations to these markets. In the case of China, what they are looking for in the short-term is evidence that for all the earlier talk of rationalising the allocation of capital, authorities have moved back into the accommodative camp when it comes to monetary policy.
India came into the year with several strong tailwinds – lower energy prices, a central bank that has enhanced its credibility and a government with a reform mandate. One and two are still contributors, but questions are being asked about India’s reform story. If there is progress on the GST (goods and services tax), the monsoon season does not affect food prices and Iran’s rehabilitation keeps the lid on oil prices, India could easily see another surge in portfolio capital flows.
Do you see the money that is moving out of China flowing back into Indian equities?
No. The drivers of Chinese fund flows have been domestic investors and I see them moving back into those funds when things settle down.
In India, where are the foreign investors investing in terms of specific sectors?
Year-to-date, in order, the Indian sectors attracting the most money from foreign domiciled EPFR Global-tracked Funds are banking, IT, automobiles, capital goods, materials and pharmaceutical.
What is your assessment of the flows in the past couple of months? Which regions have seen a pullout and in which regions has this money been deployed?
As they did during the first three months of 2015, mutual investors spent April, May and June pumping money into fund groups connected to markets backed by significant quantitative easing (QE) programmes. This preference enabled EPFR Global-tracked Europe Equity Fund flows to push deeper into record setting territory despite the Greek debt crisis taking several turns for the worse and Japan equity funds to record their biggest quarterly inflow since 2Q13 (second quarter of 2013), while Global ex-US Equity Funds, which on average allocate 70 per cent of their portfolios to Japan and Developed Europe, accounted for all of the global equity fund flows for the quarter. Among the few EM country fund groups that fared well in 2Q15 were India equity and bond funds and Thailand bond funds.
Some reports indicate cash levels with fund managers have jumped to the highest level since the Lehman crisis. What is your assessment?
We are not seeing it in the fund groups we track. Although average cash allocations have edged up after bottoming out in the first quarter of 2014 (1Q14) – and spiked in mid-first quarter of 2015 (1Q15) – they are still below Lehman-crisis levels.
Do you expect signs of a reversal or taper in flows from the emerging markets to the developed markets in anticipation of a hike in interest rates by the US Federal Reserve (US Fed)?
If the Fed ends up with one hike of 0.25 per cent - or below, which I think is a possibility – by the year end, then we believe flows for EM equity and bond funds will not be hit that hard.
Do you think the problems in Greece and China have been contained for good or could they resurface going ahead? What are the implications for global fund flows, especially to India in this backdrop?
Certainly not for good. In both cases, I think we’re looking at 18-24 month ‘fixes’. We’re going into the summer holiday season in the US and Europe, and I expect investors will wait until early September to see how the respective ‘solutions’ play out before making significant changes in their allocations to these markets. In the case of China, what they are looking for in the short-term is evidence that for all the earlier talk of rationalising the allocation of capital, authorities have moved back into the accommodative camp when it comes to monetary policy.
Do you expect global central banks (BoJ, ECB and PBOC) continue to print more money over the next few years?
Yes, I do. Over the past 18 months all three markets have shown that any form of tightening threatens key policy goals. Hiking Japan's sales tax stopped the recovery in domestic consumption dead in its track, tighter credit undercut the growth targets China's leadership sees as the key for political and social stability and any hint of a tighter policy that reverses the export competitiveness of the euro has drawn a swift, negative reaction from investors.
Some experts suggest China, Russia, Japan, North Korea and Ethiopia to be attractive investment destinations. Do the fund flows (to these regions) also support this argument?
China yes, Russia emphatically no, North Korea and Ethiopia maybe.
According to reports, EM equity funds witnessed an outflow of $21 billion during the first half of the year with India seeing an inflow of $9.5 billion from worldwide investors. What do you attribute this to? How long can the outperformance last?India came into the year with several strong tailwinds – lower energy prices, a central bank that has enhanced its credibility and a government with a reform mandate. One and two are still contributors, but questions are being asked about India’s reform story. If there is progress on the GST (goods and services tax), the monsoon season does not affect food prices and Iran’s rehabilitation keeps the lid on oil prices, India could easily see another surge in portfolio capital flows.
Do you see the money that is moving out of China flowing back into Indian equities?
No. The drivers of Chinese fund flows have been domestic investors and I see them moving back into those funds when things settle down.
In India, where are the foreign investors investing in terms of specific sectors?
Year-to-date, in order, the Indian sectors attracting the most money from foreign domiciled EPFR Global-tracked Funds are banking, IT, automobiles, capital goods, materials and pharmaceutical.