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While on the one hand the global markets have been rattled by the prospects of winding down of the US Federal Reserve's bond buying programme, it has been a double whammy given the rupee's slide against the US dollar. Nikhil Johri, managing director and chief executive officer, BNP Paribas Mutual Fund, tells Puneet Wadhwa in an interview that investors are starting to allocate funds in favour of developed markets on improving growth prospects. Edited excerpts:
Market expectations about the pace of the US Federal Reserve's (Fed) quantitative easing (QE) have been erratic, given the divergence of views and the mixed signals that the economic data has given. What is your assessment of how things stand?
We expect that some time in the next three-four quarters, the Fed will begin to taper the quantum and pace of its QE program. US asset prices - primarily equities and house prices - have started inflating.
Economic confidence is slowly improving and unemployment is inching down. Most importantly, bond yields are rising, signalling improving growth expectations. All these factors will make the Fed revisit the size and extent of its QE programme. However, an increase in the Fed funds rate is still at least a few years away.
Have the QE measures/stimulus done irreversible damage to the global economy, markets?
The long-term success or failure of the QE program of the developed world can only be judged in distant posterity. The jury will remain out for several years on this question. But what cannot be denied is that the exaggerated fears of high inflation, even hyper inflation, by ideological conservatives have been proven grossly unfounded.
At least in the near term, QE has done more good than harm to the developed world. But effects on emerging economies, such as India, are more ambiguous. To the extent it has supported global growth, it is good for India. But it has also led to volatile capital flows and distortions in commodity markets which affect India negatively.
Is the worst behind us on the rupee, bond yields?
It is difficult to say if the worst is over for the rupee, because the fall was led not so much by local factors but global fears on QE. At least in this round the decline in the RUPEE is not very different from what we've seen in many other emerging market (EM) currencies. The Reserve Bank of India (RBI) is intervening. However, any direct intervention by the RBI in the forex market will be limited. On bond yields our view is that it will continue to directionally come down in the medium-term, though for short periods these could tend to be volatile.
How are foreign institutional investors (FIIs) evaluating all these developments? Do you sense a shift in their allocation strategy and commitment levels to the EMs, especially India, given the macros and the political landscape? What about China?
From the flows it is clear that whatever be the near-term issues, FIIs' commitment to India remains strong. However, given that many emerging markets such as China, Brazil, etc are slowing down while developed market growth expectations are improving, some reallocation in favour of developed markets is happening.
Flows into EMs will be on a country specific bottom-up basis, going forward. For instance, in the case of China, the economy is clearly slowing down but money is still flowing into many companies and sectors that are doing well and benefiting from the rebalancing from investment to consumption.
What has been your asset allocation strategy over the past one year and do you see this changing over the next 12 - 18 months? Which (sectors, stocks) are you looking to add and reduce?
We are overweight on sectors such as telecom, private banks, healthcare, oil & gas and underweight on PSU banks, commodities, industrials and technology. We are satisfied with our current positioning, but may look to selectively add some banks and consumers on correction.
Realty, telecom and banking sectors have seen a lot of regulation/policy-related news flow lately? What is your investment strategy regarding these sectors?
Telecom is our biggest overweight and we remain bullish on the consolidation in the industry. In realty, we have taken a stock-specific approach, even as we are not very sanguine about the sector's overall prospects. In banks, we continue to prefer private banks and NBFCs (non-banking finance companies).
Equity funds have reported highest outflows in eight months, while gilt funds have also come under heavy profit booking. How have you fared and what is the road ahead?
Like the market, we are also witnessing significant inflows in dynamic bond funds. We recently launched our gilt fund, which collected upwards of Rs 300 crore. Yes, we have seen some profit booking by investors but we believe investors in long-term fixed income funds should use the current markets as an opportunity.
Among commodities, gold and crude oil have seen a massive slide since the past few months. Have we hit bottom or is there more on offer over the next few months?
We remain bearish on most industrial commodities, given the continuing slowdown in Chinese investments and adequate supplies. We are neutral on the prospects of gold from the current levels. While the global mood on gold is clearly not very optimistic, we believe the steady demand for physical gold will act as a floor for prices. In the case of agri commodities, the trends are very different from commodity to commodity and even region to region.
