 "A man walks past the Federal Reserve in Washington")
There were positives and negatives which emerged from US Federal Reserve Chair Janet Yellen’s speech on Wednesday night. First, on expected lines, the Fed decided to increase its interest rate by a quarter of a percentage point. A steeper hike would have resulted in a stock market frenzy on Thursday. On the flip side, the Fed has indicated three rate hikes in 2017 against a previous estimate of two. While many experts say this may be rhetoric and there is no need to panic, they also warn of a possible withdrawal of investments by foreign portfolio investors (FPIs) across emerging markets (EMs), including India. In fact, a majority believe with the Fed hike on Wednesday being termed a “vote of confidence” in the US economy, the current trend of FPIs increasing their exposure to developed markets and paring their holdings in EMs may extend to 2017 as well.
In this case, they advise investors to be cautious about stocks in which FPIs have significantly shored up their stakes in the past two years. Most developed markets have over the past decade resorted to interest rate cuts and by 2015 were in a negative interest zone, an event that resulted in huge money chasing equity in EMs. “If there has to be three rate hikes by the Fed, it could result in a FPI pullback in the Indian market,” says A K Prabhakar, head, research, IDBI Capital. “The valuation premium attached to Indian equities will shrink”. Ajay Bodke, chief executive officer and chief portfolio manager, Prabhudas Lilladher, adds that expensive franchisees will have a higher propensity to top-slicing if FPIs resort to rebalancing their holdings. However, he feels, market-leading frontline stocks could be less vulnerable to an FPI sell-off, given their dominance in their sectors.
“Stocks of oil companies, paint companies, tyre manufactures and those in the aviation sector that had run ahead of fundamentals and in which FPIs had increased their stakes could be under pressure in the coming months,” Bodke says. Prabhakar prefers to remain mindful of stocks in the microfinance industry, private banks (YES Bank and IndusInd Bank) and the automobile sector. Stocks FPIs could sell include Indiabulls Housing, Bharat Petroleum, Bharat Financial (earlier SKS Microfinance), Bajaj Finance, Bosch, Eicher Motors and Hero MotoCorp, say experts.
State Bank of India, Kotak Mahindra Bank, Union Bank, TCS, Infosys, Larsen & Toubro, M&M, Mahindra Finance, Bajaj Auto, Power Grid and MindTree could find favour with FPIs, experts add. The chief executive officer of an international equity brokerage offers some comfort to investors. “While I don’t eliminate the threat of FPI redemption in India, equities may be a little more resilient to FPI sell-off because India is the only country where there has been any noteworthy policy reforms in the past year,” he points out. This, according to him, will help FPIs retain their “overweight” position on India. Also, most local investors believe that domestic institutional investors will step in to rescue stocks that face FPI selling in 2017. “Domestic institutional investors tend to be very price-oriented and will use any significant correction to accumulate value stocks being shunned by FPIs,” Prabhakar says.
How markets behaved after previous rate hike
The US Federal Reserve raised rates for the second time in a decade. Incidentally, the last rate increase was exactly a year ago. The markets have been lacklustre in the past one year. To be sure, the weak performance cannot be attribute to the Fed move. Initial weakness, after the Fed hike, was due to global growth concerns and meltdown in commodity prices. However, analysts say higher rate in the US have impacted foreign flows into markets like India.
Voices
Voices
“Changes in fiscal policy or other economic policies could potentially affect the economic outlook… it is far too early to know how these policies will unfold”
Janet Yellen, US Fed chair
“The increase was long anticipated and fully priced into the market. It's more important to look at the Fed's guidance in terms of where rates might be going in 2017 and beyond”
Christopher Molumphy, CIO, Franklin Templeton Fixed Income Group
“The markets have already factored in the possibility of a 25 bps hike; that's why the muted reaction. Even if there are three hikes next year, the impact on Indian markets would be minimal. If corporates do well, the markets would remain positive”
Raamdeo Agrawal, Joint MD, Motilal Oswal Financial Services
“The Fed's decision means tighter financial conditions for the emerging world. It is not a disaster because they can offset that through other means”
Mohamed El-Erian, former CEO, Pimco (to Bloomberg TV)
