Q&A: Cameron Brandt, Senior Global Markets Analyst, EPFR Global

'India's public finance, oil price are big issues'

Indian and global equity markets saw substantial outflows in the month of May due to concerns ranging from Europe to China. In an interview with Jitendra Kumar Gupta, Cameron Brandt, senior global markets analyst at EPFR Global, which provides fund flow and asset allocation data (for over $13 trillion) to financial institutions across the world, shares his views on the issues. Edited excerpts:

In last couple of weeks, we have seen FIIs (foreign institutional investors) pulling out from Indian markets. What is the trigger and how much more outflow is India likely to witness?
There are two main and well-chronicled reasons for the shift in sentiment. The first is the fear that China’s efforts to rebalance its economy and head off asset bubbles fall short of what is really needed, and is setting up a situation where more harsher measures would be needed. China is now a key trading partner for most of the region’s larger economies and an abrupt deceleration of its economic growth would have a ripple effect.

The second is the Greek debt crisis and its impact on that region spells trouble for Asian exporters, almost any way you cut it. While China-US trade tends to get headlines, a slightly bigger share of China’s total exports goes to the EU-27 — which also happens to be India’s largest trading partner — and weaker demand from this region will have a real impact.

How are foreign investors pursuing Indian markets vis-a-vis emerging markets, particularly China?
Overall, India is viewed as a defensive play, albeit one with an IT (information technology) angle. So, the likely response to the country’s strong GDP growth by foreign investors will be a reassessment of plays geared to the domestic demand.

According to you, where is the global investors’ money flowing now in terms of assets classes and markets?
Since mid-2009, the bulk of the fresh money coming into the major fund groups has flowed into the four major bond fund groups: US, global, high yield and emerging markets bond funds. Flows into high yield bond funds have, however, turned sharply negative in recent weeks. Year-to-date winners among the equity fund groups — albeit at modest levels — are Pacific, global, global emerging markets and EMEA equity funds.

Flows into emerging markets bond funds have picked up markedly since the beginning of December 2009 quarter, with funds investing in local currency debt faring particularly well.

How is the currency risk perceived now?
The strong flows into local currency emerging markets bond funds, allied to a longer-term pattern whereby fund managers are rotating out of dollar-denominated assets, suggest the whole issue of currency risk is being re-evaluated and currencies of emerging markets with solid fundamentals are being viewed as less and less risky.

What are the key concerns that foreign investors have in their minds regarding the Indian market?
India’s public finances and the price of oil are probably the two biggest macroeconomic issues. The uncertainty created by the Greek crisis has reinforced a long-standing coolness among FIIs to markets with big current account deficits. India’s, if you add in the states, could well be running around 10 per cent of the GDP at the moment. Given that India imports some 80 per cent of the oil it uses, spikes in prices translate — via the trade balance and fuel subsidy system — into bigger deficits and producer-driven inflationary pressures.

Are global investors waiting for a bigger correction in the emerging markets, especially Indian equity?
We don’t think so. There is still a lot of liquidity out there chasing a finite number of good quality assets. As for India, again, no. Investors are very anxious to put the money they preserved from the 2008-09 recession by moving it into ultra low-yielding money market funds.

Despite good earnings and economic growth, countries like India are suffering due to the ills of the European economies and the US market...
While it is not entirely fair, India’s fiscal issues and the extremely slow unfolding of the anticipated reform story give those external issues a resonance. India is also linked by trade and remittance flows to those economies.