India will see more sustainable and static capital flows in the time to come, Vikas Khemani, executive vice president and head (institutional equities) at Edelweiss Securities, tells Krishna Merchant. Edited excerpts:
How are the foreign institutional investors viewing developments in India? Will they continue investing in Indian markets in FY12?
Last year, we saw huge inflows into the markets. This year, however, the fund flows have been very slow, except for the last week of March when funds started coming into emerging markets, including India.
If we see the broader trend, more and more money is coming into emerging markets. India will also get a fairly large share of that.
Do you feel funds have come into India because of the rupee-dollar equation?
The currency and rupee-dollar movement definitely play significant role. The rupee is expected to remain strong, backed by current account deficit, which has been reducing since two months because of the strong export movement.
Second, we saw significant amount of foreign direct investment picking up with the Reliance-British Petroleum deal, Cairn India deal, Vodafone deal, Siemens open offer and few other private equity deals.
India will also have a lot of capital flows that are more sustainable and static in nature, and that has the rupee’s support.
Besides currency, fundamentals have not changed. However, negative factors seem to have peaked out. The high interest rates and rising commodity prices continue to be a concern, though.
Fund flows are coming back to emerging markets and India is a beneficiary of that. Additionally, a lot of short positions got covered, contributing to this rally. We expect consolidation and if positive news flow comes in, we may see further flows.
What kind of fund flows do you expect this year?
It depends on how the liquidity situation pans out. This is a liquidity-driven rally and was a surprise to everyone.
It all depends on whether quantitative easing-3 happens or not; whether Japanese carry trade occurs and how the situation pans out in West Asia and Portugal.
Some of the capital goods and power companies have seen strong order inflows in the past weeks. Do you feel the economic cycle picking up?
It is too early to say that as there are policy-related and capital-cost related issues. We have not seen significant movement in either of these. If policy-related issues improve, such as orders not getting delayed and there are reforms in distribution system, it will help the economic cycle pick up. We have seen long periods of low Industrial Production (IIP) numbers and low investment phase. If inflation peaks out in the next one or two quarter, interest rates will also peak. We can see some movement in order flows.
Should retail investors look towards capital goods and power sector for investment?
If you look at long-term (five-year) perspective, investment activity will pick up. India is likely to grow at 8-9 per cent. From a long-term perspective, many things look attractive. Some of the blue chip companies also look good.
Crude has been hovering around $122/bbl, but the markets are holding on to the gains. Why?
This is beyond my comprehension but liquidity factor could be playing in. Crude, at $122/bbl, and other commodities trending upwards are a cause of concern for the fiscal as well as the current account deficit.
Do you feel the uptrend is over for the information technology stocks?
The IT sector had a huge rally and now the growth in the immediate future is also factored in. As the earnings kick start, the stocks will react depending on underperformance or outperformance.
Going forward, what are the themes that investors can play on?
There are two kinds of themes one can play on. One can work on sectors which have seen a significant amount of capital work in progress or balance sheet growth in the last few years, after which, P&L (profit and loss) growth will follow. These stocks will do well because the market is going to reward the cash flow and P&L growth.
Companies which are not so immune to the cost pressures will also do well. Pharma is a good sector, fits well into balance sheet growth criteria and the domestic formulation story is also a good investment bet.
