The Indian markets have seen a revival of foreign flows since July amid hopes of the reform process getting back on track. Saket Misra, managing director —strategic equity solutions, RBS Global Banking & Markets tells Puneet Wadhwa that these flows may fluctuate given the uncertain outlook for the global economy. Investors are looking for a consistent commitment to structural reform, he says. Edited excerpts:
India has attracted healthy foreign flows since July. Do you see this continuing for the remaining part of the current fiscal or do you expect these to taper off seeing no change in the economic fundamentals?
There have been multiple, positive stimuli. Oil prices dipped till late June, gold imports have tapered off. The government announced measures to improve the investment climate — faster approvals for investment proposals, attractive NRI deposit rates and larger quota for foreign investors in corporate/treasury debt.
A lot of hope is placed in the policy making and execution under the new Finance Minister, P Chidambaram. Flows may fluctuate because global economic uncertainties remain high; investors can lose patience in a credit off market and do not wait for reforms to bear fruit, or if the reform agenda is not followed through.
Do investors still remain concerned with the relative inertia around policy implementation and reform, patchy rainfall, lower growth amid sticky inflation and governance issues with respect to India? If that is so, the foreign flows seem to tell a different story.
Flows by nature are usually easily reversed, especially as the underlying investments become “market linked” — traded debt or equity. So, issues like a credit rating downgrade become important. Due to factors mentioned earlier, there is a positive momentum. Nearly $4 billion have been raised by Indian banks/FIs at competitive rates.
While concerns remain real, India risk is seen as “acceptable and attractive” based on the counter-acting positives especially in government policy and global trends. Consistent confidence will emerge if “escape velocity” is generated by a combination of factors — the most important being structural reforms — primarily around investment approvals and subsidies, fiscal rectitude including reform of the tax structure and management of inflationary pressures.
There have been some announcements regarding reforms for the Indian primary markets and the mutual fund industry. Do you think these could bring back investors? What key reforms would you like to see get implemented first?
The announcements are positive, but longer-term, higher impact measures are needed for materially increasing investor interest. Key reforms that the market would like to see include accelerated project approval process being implemented – at the very least the more routine approvals should start moving quickly; continued movement towards reduction of subsidies, especially around fuel; renewed push for keeping the fiscal deficit under control and resolution of uncertainties — coal supply and tax environment that discourages investment.
How do we compare with the other Asian and emerging market peers in terms of valuations given the macros? What is your assessment of the recent statements from the various central banks?
It is difficult to compare across markets given the size and more domestic nature of India’s economy. Investors are looking for a consistent commitment to structural reform and creation of an atmosphere that reinvigorates investment in the economy across the public and private sectors.
Central bank statements have had two themes. One, they remain concerned, watchful and are ready to act at short notice based on economic indicators, and two, they believe they have the necessary and effective arsenal to cope with market developments.
The US Federal Reserve (Fed) remains in a wait and watch mode. The next round of quantitative easing is not a given and will happen once the Fed is clear that an announcement will not trigger further panic and most importantly their proposed steps have a high likelihood of succeeding.
Given the data coming out in early September, look out for announcements after that. European focus will be around implementation of the support possibilities announced by Draghi, and the acceptability of the “conditionalities” governing the support – both with the potential recipients and with the sponsors. There still remain fairly disparate views with the European policy makers that need to be reconciled prior to dramatic action.
Have you toned down your estimates of full-year earnings of India Inc given the June quarter results, especially for the banking, consumer durables and manufacturing-related sectors?
Given the global headwinds and the overhang of domestic issues, there is some reduction in expectations of India Inc revenues and profitability. Having said that, if fuel prices remain broadly under control and some of the announced policy measures are implemented, we should see the positive impact in about six months time.
Can you name a few sectors and stocks that look promising at the current levels?
Purely given the requirements of the country and reform possibilities —infrastructure players that have a relatively high percentage of projects near or post completion and strong liquidity in terms of financing sources would be winners in the medium-term. Financials may also be attractive, especially those that can maintain good credit quality.
What are the levels that we could see on crude, especially Brent, given the current geo-political scenario?
Crude prices have come up a fair bit from the troughs seen in late June. Usual seasonal strengthening has been accentuated by uncertainties around supplies related to the Iran situation and anomalous high temperatures in the US and other parts of the world.
For now, increased supplies from sources like Saudi Arabia, Iraq and Libya have compensated for Iranian crude. However, given the production levels, there may be further rise in oil prices as winter approaches and demand increases with even small improvements in the global economy.