In an interaction with Jinsy Mathew, Vikas Khemani, president and head (wholesale capital markets), Edelweiss Financial Services Ltd, shared his views on the road ahead for the Indian markets and foreign institutional investors’ (FIIs) take on the present complex global environment. Edited excerpts:
Markets witnessed a lot of volatility in the last two weeks. How do you expect these to pan out?
The global environment is complex. The threats of European default and American double-dip recession, actions by the developed world to come out of these and implications of the overall action are extremely complicated.
A weak US economy (despite the intense monetary easing), disagreement over possible solutions to European problems and the looming possibility of a euro collapse are the events that can lead to any outcome in financial markets. Unfortunately, markets do not have any historical precedent of this magnitude and complexity to seek guidance, hence on escalation, markets end up reacting much more starkly than in a normal environment.
There seems to be a temporary relief, with the German parliament voting for an enhanced European Financial Stability Facility. We will have to wait and watch the implications. It appears we will see markets gaining some positive direction shortly. However, a highly volatile environment can’t be ruled out.
How different are we from the Lehman times? The euro zone problem was always known, as was the situation in the US. So, why this sudden reaction?
During the Lehman crisis, problems were largely confined to the US and around individual defaults, thereby putting pressure on the banking system. This time, the issue is over sovereign leverage spread across many more countries. This is also linked to the potential collapse of the European Monetary Union, with extreme political complications. While the problem is known, there would always be a trigger point that leads to the spiralling effect. The subprime crisis was known for almost two years before it actually led to the collapse of the system.
By when do you expect the worst to be over?
Barring the global situation, I think Indian markets are bottoming out. We are at the end or closer to the end of the policy rate hikes. We will see the bottoming of corporate earnings over the next two quarters (September and December). Inflation will also peak out in the mean time. By March (2012), I expect the worst to be over and by the next financial year, markets will reverse and we may see an upward trend setting in.
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The rupee was on a free fall recently and the Reserve Bank of India’s intervention did not help much. Where do you see the rupee heading?
Any intervention in this kind of environment cannot be of much use. The rupee depreciation was in line with most emerging market currencies and was mainly due to global reasons.
It’s the temporary demand-supply mismatch which is sustaining the pressure. The fair range should be between 44 and 45, and we might get there once the environment settles down.
How do you see FIIs reacting to the rupee fall?
Considering that the rupee has become cheaper, it’s an enormous opportunity for foreign investors. For new investors, Indian equities in foreign currency terms have become 10–15 per cent cheaper than what these were a few weeks ago.
However, we do not see any immediate and significant flows from FIIs, considering the panic-like situation in the market. I think it would happen largely after the macro-economic factors start improving.
How is India placed among emerging markets as an investment destination?
When the uncertain times are over, India will emerge as one of the prime contenders and a desired investment destination among international investors. Structurally, the Indian story is by and large very strong and not dependent on foreign demand or strong commodity prices.
However, we’ll have to control our loose fiscal policies. Had we not been troubled by the local macro issues (like inflation, interest rates and fiscal deficit), India would have been the best performing market this year.
What are the sectors/stocks that you are comfortable investing in the current scenario?
Interest-rate sensitive spaces are very attractive, as they have corrected significantly. Capital goods and infrastructure is one space which will pick up in the coming months.
However, with regard to banking, I will be picky, as non-performing assets may play spoil sport. Telecom is another area that looks good. Though there is an upheaval due to the 2G scam, it is more on the consolidation part.
What are the sunrise sectors?
Healthcare, education and food processing are some areas which will see a huge boost in the coming times.
Has the global risk aversion prompted investors to move into safer assets like debt?
Given the current volatility in stock markets and the interest-rate environment, the risk-reward for investing in debt is favourable. One can expect nearly 20 per cent returns from debt instruments in a year, as interest rates come down.
