Election disappointment could lead to serious correction: Saumil Shah

Interview with MD & head of equity sales trading, Bank of America Merrill Lynch

Foreign flows to India will hinge on the outcome of the elections, believes Saumil Shah, managing director and head of equity sales trading, Bank of America-Merrill Lynch. In an interview with Sneha Padiyath, Shah talks about the dormant initial public offering (IPO) market, the possible impact of the El Niño on equity markets and the participation of foreign institutional investors (FIIs) in Indian markets. Edited excerpts:

So far this year, the markets have seen a good run. Do you think there is more upside left?

The markets have run up quite a lot, rallying about 11 per cent from February. The markets are getting tired, following the huge burst of FII inflows in March. As we head towards the election outcome, the markets should consolidate and adopt a wait-and-watch approach. It is logical that we’ll see a bit of a correction ahead of the results.

Have the markets fully factored in the outcome of the elections?

The markets are factoring in the Opposition will secure a majority. Any disappointment might lead to a serious correction. The election results are on Friday; we will definitely see the markets being fairly volatile on that day. A clearer trend will emerge through the following weekend, once a clear sense emerges on how the new government will be formed.

Last year, FII flows hit record highs. What are your expectations for this year?

If the verdict is for a strong government, it will boost foreign investor confidence and hopefully, we will see record flows this year. In case of a disappointment, you might see funds leave in the short term. Long-term investors will be opportunistic in buying if they see a huge correction. The election outcome is definitely going to be the decider on the trend of flows this year. After that, the new government and its policies will be the key driver.

How worried are participants about the effect of the El Niño weather phenomenon?

The market is watching the signs of El Niño closely. If rains disappoint, food prices will move higher. Rate cuts, currently expected by the end of December, could be pushed to 2015. This year, growth in gross domestic product could be affected by 50 basis points. El Niño is definitely a concern, but the election outcome will clearly set the trend for investor sentiment.

What has been the nature of FII flows this time?

Inflows have primarily come from GEM (global emerging market) funds, partly because developed markets have not performed very well so far this year. Additionally, even within the emerging markets space, India is getting a higher share of inflows, as we are perceived to be better placed due to expectations of a strong verdict in the elections. It helps that we are up nine per cent in dollar terms, as performance has been hard to come by in global equities this year.

Which sectors look to benefit from a favourable election outcome?

In case of a strong election mandate, banks will definitely move up on hopes of a recovery, as will infrastructure stocks on hopes of increased spending. Expecting reforms, oil and gas stocks and state-owned companies will also do well. Also, pent-up consumer discretionary demand might return in the automobile space.

Do you see a turnaround in the primary market this year? What kind of issuances is likely in the market?

There will be more of add-on offerings for existing players, though I think the IPO market will be revived once retail investors start to show more faith. The government could divest to narrow the fiscal deficit. Offers for sale and qualified institutional placements will be the main routes for raising capital. To satiate the appetite of foreign investors GDR (global depository receipt) and ADR (American depository receipt) offerings will take off.