India can get annual FII flows to the tune of $15-20 bn: Vikas Khemani

Interview with President & CEO, Edelweiss Securities

As the global financial markets await for the outcome of the US Federal Reserve's decision on interest rates later this week, Vikas Khemani, president and chief executive officer, Edelweiss Securities, tells Puneet Wadhwa that a dovish forecast, despite a rate rise, could provide a temporary breather to the global markets. India, he says, still remains foreign investors' favourite among the emerging markets. Edited excerpts:

How do you think global financial markets will play out over the next six months? How much time-wise and price-wise correction can we expect, given the possibility of a rate rise by the US Fed and developments in China?

The slowing growth in China and the improving outlook in the US are both events of significance. Both the central banks - the US Federal Reserve (US Fed) and the Peoples Bank of China (PBOC) - are trying to do adjustments through either rates or currency and it is likely to induce volatility in the market.

Whenever such currency-led movements occur, the market always tends to surprise. The FOMC (Federal Open Market Committee) meeting later this month is likely to be crucial. A dovish guidance (despite a rate rise) could provide a temporary breather to the global markets. I do think these adjustments are unlikely to be resolved in a hurry. This will take years to rebalance and, hence, might (re) appear at different times in different forms.

What about Indian markets?

India is one of the biggest beneficiaries economically of the current global situation from a medium to long-term perspective. However, in the short term, liquidity driven flows can surely create volatility for some time.

India saw the highest pullout of funds by foreign institutional investors (FIIs) in recent history during August. What is the road ahead for the next six to 12 months?

The recent selling appears to be done mostly by global emerging market (GEM) funds. Our interaction with foreign investors suggests they are overweight on Indian equities and believe India remains their favourite. They are selling not because of India-specific factors, but due to large EM redemptions. Interestingly, India dedicated funds are getting inflows. I believe that once the dust settles, India will receive good FII flows of approximately $15-20 billion annually. Monthly redemption can always happen, but the trend is positive.

By when do you think the worsening of global growth will start to get reflected in India Inc's earnings and are the markets factoring in this right now?

Global growth is impacting the earnings of some select commodity sectors like metals and oil and gas. Other export-oriented sectors aren't much impacted on growth, on the contrary they are benefiting from currency weakness. Ideally, one should have balance of export-oriented (IT, pharma) and domestically oriented sectors (BFSI, FMCG, Capital Goods) in the portfolio as both are expected to have good growth in time to come and also provide some sort of hedge.

What is your estimate of interest rate cuts for the current financial year?

We expect another 50 basis points (bps) of monetary easing in FY16. The delay in easing is definitely hurting India Inc. and RBI should be more aggressive in cutting rates, given that there is global deflation. Also, there should be focus on transmission of the previous cuts.

The market jitters have come in at a time when the primary market was getting revved up. Do you see companies now deferring fund raising plans?

Primary markets are a function of good secondary markets and it will pick up only once there is stability and optimism in the markets. There are many interesting companies that are waiting to raise capital and will tap markets once markets stabilise.

So, should investors remain fence-sitters till the uncertainty and volatile phase is over or is it a good time to buy from a 12-24-month perspective?

I think the 15 per cent correction in equities (30-40 per cent in case of some stocks) provides the investors a wonderful opportunity to buy from a 12-24-month perspective. In terms of sectors, banks and industrials look attractive. For banks and industrials, there are signs of capex cycle revival. Over the next six-12 months, we expect this to further accelerate. This, along with monetary easing, should result in banks and capital goods stocks rallying. We would also recommend investors to remain invested in IT and pharma companies, as these are a direct hedge against rupee and business exposure is mainly to the US and Europe, where demand is relatively stable.