Nimesh Shah, MD & CEO of ICICI Prudential AMC shares his views with Aastha Agnihotri on the recent downtrend in the domestic equity markets and the surging outflows. Excerpts:
What has lead to the current underperformance in the emerging markets, especially India?
If we take emerging markets overall, the growth dynamic has been affected by soft commodity prices, weak demand in developed countries leading to tepid exports growth and lack of structural reform in many countries.
The real GDP (gross domestic product) growth is weak in large economies like Europe, China, Japan etc. And even in the US, growth is being led by construction and mining which do not have very strong trade linkages with emerging markets.
Coming to India, we have always felt that the country given its structural problems of high current account deficit (CAD) and inflation would be experiencing a slowdown as the mix of economic growth needs to shift more towards exports and investment from consumption.
Usually, these shifts take time to play out as the economic slowdown creates space for monetary easing and has to be supplemented by reform in terms of improving the climate for doing business, reducing distortional subsidies, incentivising investment by corporates etc.
What seems to have happened is that investors, especially the foreign institutional investors (FIIs) towards the end of last calendar year underestimated the slowdown that would result from the redressal of structural problems and are now being a bit disappointed.
Indian markets have already drifted significantly lower from their recent highs. Do you foresee significant down side over the next few months?
Our base case scenario is that there is not too much of downside left. Significant downside is likely mostly from instability in the global capital markets as India being an importer of capital is prone to such shocks. However, it is not something we are assigning a very high probability to.
Unfortunately, the biggest problem for equity markets is that if you are interested in making money, you have to very aggressively invest when times are bad; and today we are in that phase. So, retail investors need to invest. Unfortunately past behaviour suggests that investors like to look at the good news and then invest. That would not work in equities.
What should investors do at the current juncture?
Currently, investors should consider investing in Balanced Funds that offer a reasonable opportunity to participate in equities at relatively lower risks and generate better risk-adjusted returns from both equity and debt components. Also, the investors should look at investing in fixed income funds as inflation is expected to come off significantly in next three – six months period, which will provide RBI room to cut interest rates.
How are the FIIs now viewing markets like the US and Japan?
In the last few days, we have seen some FII outflows. However, it is too early to call it a trend. The bottom-line is we have to finance the CAD and thus capital outflows would be a big concern.
The best thing from a long-term perspective would be if we are able to make capital intensive sectors attractive to FDI (foreign direct investment) inflows, which would be much more stable and long term. That would take away dependence on FIIs for financing the current account.
The risk here is FII outflows cause currency depreciation which reduces the returns for foreign capital and that becomes a vicious cycle.
We also need to consider the fact that flows can be very volatile and to build market view solely based on such flows can be risky. It is better to focus more on fundamentals and while we see a material slowdown in the economy currently, there seem to be pockets of the market which are looking attractive.
What is your view on the current political turmoil back home and how big a concern is that for foreign investors?
The political landscape is definitely one of the key dimensions in evaluating the investment outlook. In that context, the recent developments in terms of a key ally - DMK - pulling out have not helped matters. Having said that, one of the silver linings has been that there has been lot of progress on fuel price hikes and the decision making in finance ministry has gathered pace. What is critical going forward is the ability of the government to stick to its fiscal consolidation path as elections approach closer.
What is your outlook on the commodity space?
Given the weak growth outlook in most big economies, it is difficult to be outright bullish on commodities although some commodity stocks may have been beaten down too much. It is actually not a bad thing for India as we have such high imports of oil and gold.
What sectors or stocks will you recommend at this juncture as we go into the earnings season?
At this moment, we like regulated utilities, telecom, selected oil and gas and mining stocks – some domestic cyclicals in auto and banks are also looking interesting now.