Q&A: Saket Misra, Royal Bank of Scotland

'FIIs are in a wait-and-watch mode'

Saket Misra, MD, Strategic Equity Solutions, Global Banking and Markets, Royal Bank of Scotland, tells Puneet Wadhwa that foreign institutional investors (FIIs) were nervous about the potential near-term macro-economic headwinds India is facing and were in a wait-and-watch mode. Edited excerpts:

How are the FIIs looking at the Indian equity markets, given the macro economic conditions?
There are three factors that will determine India’s position as an investment destination. First is the valuation vis-à-vis other emerging markets (EMs) and BRIC countries. The relative value and resultant investment is then governed by changes in portfolio allocation and how much money institutional investors raise at the backend. The second factor is the fundamentals of the Indian economy, which has been its strong point. The third is global uncertainties. Deleveraging in the dollar is also a factor here. The FIIs, overall, are positive. – in fact we have seen some uptick in FII buying across the debt and equity space since June – perhaps reflecting that they see value. But they are clearly nervous about some of the potential near-term macro-economic headwinds India is facing. They are in a wait-and-watch mode right now.

Do you think fundamentals of the Indian economy have weakened, given rising interest rates and soaring inflation?
The growth momentum has slowed down. We are no longer in the 9-10 per cent growth range, but probably around seven per cent. Investors are concerned about stability and improvement in long-term growth prospects.

How will the equity markets pan out in the near-to-medium term?
Till now, Indian corporates have been able to pass on the rise in input costs. However, whether they will be able to do so going ahead in a softening economic scenario will have to be seen. This combined with higher interest rates; subdued investment levels do not signal a lot of immediate upside. In the medium- to long-term, however, India remains a fantastic story. As long as one is willing to invest with a three five year period, and exercising some judgment in terms of investing in solid, cash accretive businesses over the medium term, India certainly holds promise. FIIs, too, are monitoring the economic developments closely. The Sensex is expected to trade in a range of 17,000-19,000 for the next 12-18 months.

How is India compared to other markets?
I feel that the only competition that India has in terms of other emerging markets is Brazil. Russia is no longer an option. China is another option but it has perhaps already been over-bought to a certain extent and we may see the impact of a planned slowing down in some sectors. The only call FIIs have to take with regard to India is how much of portfolio allocation they should change given the problems in the US and the euro zone. India still remains a favourable destination from a long-term perspective.

How do you see the commodity prices moving over the next one year?
Oil and energy prices have corrected significantly. There is still pent-up demand for oil across all emerging markets. Clearly, this will be reversed if there is a major dip in global economic activity. Gold has been invested into as a safe haven recently. There is also a lot of derivative-based buying of gold globally. It may remain strong, but the situation may change if the global economy stabilises fast. Metal prices will remain volatile depending on how much construction activity takes place in India.

What return do you expect from different asset classes (equity, debt) in FY12?
There is some amount of limitation on how much upside there is in equity given the levels it went into last year and the current uncertainties. Interestingly, the yields on “AAA” paper in India have been on an uptrend. So, if one has an opportunity, it is an interesting time to invest in debt as the risk-reward ratio is favourable.