In terms of opportunity, India is among top three EMs: Cameron Brandt

Interview with Director of research, EPFR Global

After pulling out nearly $3 billion from Indian stocks in the first two months of calendar year 2016, foreign institutional investors have invested around $1.5 billion thus far in March. Cameron Brandt, director of research at EPFR Global, tells Puneet Wadhwa that the progress on the goods and services tax (GST) issue and a good monsoon season can see flows rebound strongly. Edited excerpts:

What is your assessment of the flows in the past couple of months?

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Investors have been edging back into risk assets over the past three weeks, with the thaw spreading beyond emerging markets and high-yield bond funds in early March to multi-asset, floating rate and technology funds.

The region that currently stands out is Latin America. After three years of bringing up the rear in flow terms, Latin America Equity Funds have enjoyed a strong start to the year – thanks to investors’ perception that the continent’s political climate has shifted decisively away from the interventionist, left-of-centre model that has steered Argentina, Brazil, Ecuador, Bolivia and Venezuela for the past decade.

Do you think investors’ reaction to the global growth/slowdown, especially related to China, has been overdone? What is the road ahead for flows into equities as an asset class?

It was certainly a delayed reaction, given that most of the causes generally cited have been on the table for some time. But overdone? Growth is faltering in both Japan and Europe, slipping from admittedly high levels in China and crumbling in Brazil, while industrial production numbers from the US coming into 2016 were alarming. So, a degree of caution was certainly warranted.

For the moment, flows are bypassing Europe and Japan equity and bond funds as investors try to get a fix on the impact of negative interest rates in both the markets.

How many more hikes do you expect from the US Fed Reserve in 2016?

I am expecting two, in June and December, partly to maintain the US Fed’s credibility and stockpile ammunition for the next downturn and partly because the data targets the Fed has said it is basing its decisions on – employment, inflation trends and growth – have a good chance of being hit. The wild card is the global economy and how much responsibility the US Fed feels it has, not to make things worse for the rest of the world. They seem to be softening their earlier stance that they do what is right for the US without any regard to external consequences.

March has been a good month for global equity markets. Do you foresee the rally losing steam? What are the key events / factors that could puncture the momentum?

Plenty of candidates, starting with a currently unexpected US rate hike after their March or April meetings or a really big shift for the worse in Chinese economic data. I believe that events in Europe pose the greatest risk.

If you are truly pessimistic, it is possible to imagine a scenario where by year's end, the UK will be on its way out of the euro-zone, tensions over a summer wave of immigrants from Syria and North Africa will have cost German leader Angela Merkel her job and put 'Grexit' back in play, the cost of issuing debt in Spain and Portugal is back at unstainable levels thanks to the weakness of their respective governments and modestly higher energy prices rallied to weakness in EM export markets will have tipped the Eurozone back into recession.

I'm not predicting this 'doomsday scenario' or discounting Europe's capacity to muddle through. But I do see the region as the biggest risk.

How are foreign investors viewing India as an investment destination?

Mutual fund investors are still digesting the Budget and much hinges on whether the rosy estimates of the bill for energy subsidies and privatisation receipts actually pan out. With the progress on the GST issue and/or a good monsoon season, I can see flows rebounding strongly.

Do you see an incremental allocation to the Indian markets within the emerging market pack in 2016?

I do. Mutual fund investors, having overbought the promise of Narendra Modi’s reform story, swung the other way in 2015-16 and aggressively cut their exposure to bring it back in-line with what has actually happened in India. In doing so, they did not give India enough credit for the tailwind lower oil prices have provided or the reforms – modest though they be – that have been pushed through. Our country selection strategy model suggests India is one of the top three emerging markets in terms of opportunity going into the second quarter.

Where are the foreign investors investing in terms of sectors, etc as regards India?

Since the beginning of 2015, financials, IT and Industrials are the three sectors in India that have seen the biggest net purchases by EPFR Global-tracked Equity Funds. Among the diversified Asia ex-Japan Equity Funds, allocations for IT and Healthcare are on the rise at the expense of Financials and Materials.