 "India can get $15-20 bn in FII flows annually: Tai Hui")
What are you advising clients and investors and which markets you are bullish on?
We have been advising investors to increase exposure to global equities, while being selective towards fixed incomes. The continued QE (quantitative easing) tapering and, subsequently, the expected interest rate rise by the US Federal Reserve (US Fed) next year is likely to lead to a rise in treasury yields through the next two-three years. This, in my view, will put pressure on fixed-income investment. Improving global economies and normalising fiscal policy should benefit equities. Investor focus should shift to US, Europe, Southeast Asia and India.
How do international investors view India and how could fund flows pan out?
So far, investors have been more fascinated by growth in the US and Europe, though we have been advising them to look at India, too. So, while foreign participation in India has been good so far, it can be better. Foreign institutional investors (FIIs)’ average investments of $15-20 billion in India through the past five years mean we can expect more flows.
From a one-year perspective, which are your top equity picks?
Besides returns, we should look at volatility, too. Volatility remains lower in US and European markets and that keeps us attracted to them. The returns of 25-30 per cent seen last year, however, might not be repeated. India has moved up in terms of its rank in the developing world, and if we go down the list, markets that have strong and resilient currencies and a strong export mix, we like Taiwan and Korea and, in Southeast Asia, Singapore and Thailand, which have current account surpluses.
Will India’s outperformance continue through the next three-six months?
We will not be surprised if there is consolidation or correction, as the election party is now over and investors will start reviewing the policies to come through the next few months. It is hard to say whether the markets will gain another 20-25 per cent. What remains to be seen is how domestic institutions respond, as these have been sellers in the past five years, while FIIs have been net buyers in 11 of the past 13 years.
What risks do you see?
One risk is the market often demands instant results and instant policy announcements. Though the new prime minister is a very good CEO and gets things done, looking at the fact that India is a big country, with a very complicated government system and an equally complicated economy, investors should not be disheartened if policy implementation takes some time.
The impact of the El Niño on inflation remains to be seen. The Fed tapering and interest rate impacts are critical. The rupee’s movement or strengthening cannot be a one-way process, and might reverse. Apart from domestic measures, the rupee’s appreciation was helped by US treasury yields falling to from 2.8 per cent to 2.5 per cent, which gave India some breathing space. However, if it rises to 3.5 per cent, the rupee might reverse a little. So, investors will have to keep in mind inflation risks, rupee risks and delays or blockages on policy implementations.
The dollar index has bottomed out and seems to be inching up. What are your views?
The US Fed is the first central bank looking to normalise policies. Also, the US ran a gigantic curb on a deficit that has come fallen from 6-6.5 per cent of gross domestic product to 2.5 per cent, and this should support the dollar. Besides, factors as energy dependence declining due to shale gas revolution in the US, too, could support the dollar. Also, with the US economy recovering, capital flows could go back to that country. So, I think the dollar’s downtrend is over and that’s why the emerging markets could see bouts of volatility, as the dollar strengthens. The rupee might not see the kind of depreciation it saw last year, with sufficient foreign exchange reserves and good central bank policies.
What are the key near-term expectations from the government?
I will be looking at what its fiscal policy will look like. They want to simplify the tax code, the GST (goods and services tax), etc. So, how is it going to pan out? Besides, how are they going to finance projects —through public offers or public-private partnerships or foreign routes? Also, how will they handle the litigation that delays implementations? And, how will they accelerate foreign direct investment — through some accelerated channels or through special economic zones or other routes?
What is your view on the commodity markets? Some commodities are again showing some signs of weakness.
China will be a huge factor. While a recovery in India might support at some level, China has accounted for the significant share of consumption of commodities, especially energy and base metals. And now, with China moderating and stabilising at 7-7.5 per cent growth rates, that does not paint a bullish picture for base metals or energy.
Also, strengthening of the dollar is typically bad news for commodities. So, the energy and base metal segments aren’t too exciting. Gold is likely to remain range-bound, at $1,000-1,300 an ounce. Agriculture remains exciting and here, demand will continue increasing. So, agriculture and equities are exciting, though agriculture is a long-term call.