Investors are looking for value in emerging markets: Cameron Brandt

Flows to India equity funds have picked up a bit recently, reflecting hopes that lower energy costs will improve the outlook for interest rates, public finances and disposable income, says Brandt

A sharp fall in crude oil prices from the recent highs has propped up sentiment in Indian equities. CAMERON BRANDT, director of research, EPFR Global, tells Puneet Wadhwa that flows to India equity funds have picked up a bit recently, reflecting hopes that lower energy costs will improve the outlook for interest rates, public finances and disposable income. Edited excerpts:

What is your assessment of the fund flows thus far in CY18? 

Since mid-year, they have become increasingly risk-averse and defensive, with flows to technology sector funds stalling, high-yield bond funds posting outflows six of the past seven weeks and both Europe equity and bond funds experiencing above average redemptions. The safe haven in the current market has been Asia (at least for equity investors), with South Korea, China and Japan equity funds absorbing $3 billion, $11 billion and $19 billion, respectively, so far this quarter.

What about fund flows to Indian equities? 

Fears that Narendra Modi’s administration is trying to compromise the Reserve Bank of India’s (RBI’s) independence hit fund manager allocation, arresting a rising trend tied to India’s impressive GDP (gross domestic product) growth and perceived defensive qualities if there is a marked slowdown in global trade. If oil prices keep falling, it is likely to bolster the country’s investment case. Flows to India equity funds have picked up a bit recently, reflecting hopes that lower energy costs will improve the outlook for interest rates, public finances and disposable income.

Will foreign investors extrapolate the outcome of assembly polls to the 2019 general elections? 

They have been overshadowed by the elections in Brazil and Mexico, where populist candidates have emerged victorious. So investors with broader EM remits have only just started to focus on them. The ‘Goldilocks’ scenario for investors at the moment is an extension of Narendra Modi’s mandate with the Opposition performing well enough to remind Modi that it is the economy and opportunity, and not sectarian divides, that the electorate really cares about.

Which sectors has the money flying to? 

The latest allocations data for Emerging Asia Funds shows a rotation from information technology (IT) and consumer discretionary plays to financial stocks. The average weighting for IT fell to a 30-month low, coming into November.

Indian markets have been mostly supported by domestic flows of late. Do you see this continuing? 

Investors are showing some willingness to prospect for value in emerging markets. Given India’s growth rate and the possibility that pressure on prices, balance of payments and the rupee from higher oil prices could moderate, I anticipate more foreign interest in the next 6–12 months. But foreign investors will move cautiously, and the Modi administration’s relationship with the central bank is being watched closely.

Do you see more allocation to developed markets (DMs) as compared to emerging markets (EMs) going ahead? 

I don’t. With the political and growth outlook in key developed markets looking increasingly cloudy — Europe’s troubles, divided government and rising interest rates in the US — mutual fund investors have gone looking for value in emerging markets in recent weeks. All four of the major EPFR-tracked Emerging Markets Equity Fund regional groups (GEM, AxJ, Latam and EMEA) recorded inflows during mid-November, the first time since April.

How big a threat is Brexit to the stability in global financial markets? 

Europe remains the area of greatest concern as the deadline for Brexit looms, Italy’s new government pushes the budget boundaries and the European Central Bank’s (ECB’s) winds down its quantitative easing (QE) programme. Europe equity funds have now posted 11 consecutive weekly outflows, while the latest redemptions from Europe Bond Funds were the largest since the mid of the fourth quarter in 2016 (mid-4Q16). At the sector level, those associated with growth are struggling to attract fresh money, with financial, real estate and technology funds the hardest hit in recent weeks. US short-term treasury funds are seeing the strongest, most consistent inflows at present.

What is your outlook for rate hikes by the US Federal Reserve (US Fed)?

Our view is that, as long as US GDP growth is even mildly positive, the US Fed will hike rates in December and three times in 2019 to build up its ammunition for future downturns. It is likely that 2020 will see one or no hike, given trends in global growth and the fact it is a US election year. The path for US interest rates remains clearly laid out and, to some degree is priced in. However, the recent move out of high-yield and leveraged loan fund indicates that many investors fear that we are getting close to a tipping point for asset values.