FII flows could halve to about $10 bn next year: Neelkanth Mishra

Interview with Managing Director, Equity Research, Credit Suisse

Flows from foreign investors are likely to slow down substantially next year, says foreign brokerage Credit Suisse. The Indian markets, however, could deliver up to 30 per cent return in the next two years, led by corporate earnings growth. Neelkanth Mishra, managing director-equity research, Credit Suisse, says the sharp drop in crude oil prices isn’t very positive for the Indian market. Edited excerpts from a press briefing by Credit Suisse on the 2015 outlook:

On the impact of declining oil prices

The decline in oil prices is due to weak world demand. The (National Stock Exchange's benchmark) Nifty and oil have positive correlation. In 20 years, you will struggle to find negative correlations between Indian markets and oil. Weak oil prices will hurt India’s exports. So, the benefit of $35 billion to the current account deficit on account of the decline in oil prices will be eroded by the drop in exports. Fuel is a small component in consumer inflation. The first-order impact on consumer inflation because of a fall in oil prices won’t be that big.

On FII flows slowing

A lot of oil producing countries are big exporters of capital. A lot of sovereign wealth funds backed by countries like Saudi Arabia, Qatar and UAE have been investing $8-10 billion into India each year. These flows will slow down substantially. The overall FII (foreign institutional investor) flows into the Indian market will come down from an average $20 billion to about $10 billion next year.

On India economic stability

The real story is playing outside India, where the world is devoid of growth. There are fears that China’s growth is significantly over-reported -- if one factors that in, the global growth scenario is worse. India is an island of stability. Even if our growth doesn’t accelerate, it is still much better than in the rest of the world. The world is going through deflation.

On quantitative easing

Even if the US is ending its quantitative easing (QE) programme, other regions like the euro zone and Japan have been printing money. Our estimate is that QE in 2015 will be 1.9 times more than this year.

30% return in the next two years

We don’t have an explicit price target for the Indian market. But earnings are expected to grow at a compounded annual rate of 16 per cent over the next two years. If that happens, the market will give 30 per cent returns over the next two years. In every economy, though, there is something to blow a hole in the story.

India’s valuations

On a relative basis, India’s valuation premium to MSCI World is still quite low, below the historic highs. But if Europe and US had to tank sharply, the relative valuations might turn expensive. There is big turmoil in the world market.

On market corrections

There is a strong feeling of being left out among investors. That’s partly a reason why the Indian markets don’t fall sharply. So far, the correction has been surprisingly orderly. But if one big bank in some geography blows up, there will be a huge sell-off. The contagion risk will hurt us a lot. Those are the events we have to be cautious of when you are looking at the Indian markets.