Worst of EM outflows could be over: Anant Shirgaonkar

Interview with Head of India equities, UBS

Foreign institutional investor (FII) selling from emerging markets this year has been more than in even the 2008 crisis. India has done relatively better, thanks to improvement in its macro parameters, says Anant Shirgaonkar, head of India equities at UBS, the Swiss global financial services company. The market, he tells Samie Modak, will remain range-bound till there is earnings recovery but there will be pockets of opportunity. Edited excerpts:

How’s the FII mood like towards the Indian market?

Investor interest is at an all-time high, going by the attendance at conferences. On a relative basis, most global funds are overweight (OW) on India. The headwinds faced by other emerging markets (EMs), including China, are actually turning out to be beneficial for India, as its macros stand out and are much better than in so many other EMs.

However, foreign investors have significantly pared their investments in Indian markets this year.

EM outflow has been a dominant trend this year. We saw outflow of $63 billion from EMs this year, more than the $39 bn during the 2008 financial crisis. India cannot be completely insulated to this but on a relative basis, the outflows from India are far less than in some of the other EMs.

Do you expect FII outflows to continue?

We think the worse in terms of EM outflow could actually be behind us. We saw a large bout of outflow in August and September. We believe that kind of outflow won’t continue. We did some inflows after that and believe flows will stabilise here on. EMs have underperformed the developed markets over the past five years by quite a huge margin. To that extent, there will be funds with a longer-term horizon which are looking at EMs as a contra trade. We will start seeing inflows from these funds.

What will be the impact of a possible rate rise by the US Federal Reserve in December?

Our house view is that the Fed will hike rates in December. To that extent, a lot of it is already in the price. The recent outflows and volatility lately can be partly attributed to that. We will see some volatility just ahead of the event but the hike has largely been discounted.

Why are investors reducing their OW position on India?

Our client interactions suggest the OW position has gone down a bit but they still remain OW. Investors are aware and worried about some of the headwinds in India, be it slowdown in reforms or politics taking precedence over economics. They are also concerned with the slowing in consumption and the investment theme not picking up the way it was expected to. However, importantly, there is a belief that with a two to three-year view, we could see a turnaround or cyclical rebound in the Indian economy. That’s what is keeping these investors positive on India.

Do you see an immediate upside for the market from current levels?

Even now, we believe the earnings rebound could be two to three quarters away. Therefore, a consensus could actually see an earnings downgrade as we move on. That’s why the upside to the market in absolute terms will be limited. We are at about eight per cent earnings growth for the year ending FY16. We think the consensus is still at 13-14 per cent and there is room for the consensus to get that lower, which will play out in the next two quarters. Till the time we digest an earnings downgrade, we would see the markets range-bound.

How should one play the market?

On relative terms, there will be pockets which will do well. Financials and private financials are the space we like. Other than that, telecom would act as a defensive. We believe there will be explosive growth in data for telecom players. Pharmacauticals is still something we are positive on, as the (financial year's) second half could see some US drug regulator approvals come through. Oil & gas we are positive on, as we think a lot of price damage has already played through. Plus, we have seen reforms in terms of petrol and diesel (pricing).

Will you buy metal companies, whose prices have crashed?

On metals, we are not taking a bet on pricing. We think prices might not improve but there is scope in some names, where a volume increase could play out over the next two years.

How is the political situation in the country impacting investor sentiment?

Clients were closely watching the Bihar election. As a state election, it should not have a very big impact in terms of policy making from the central government or it will be a sentiment-negative. Some of the recent statements from the finance minister are extremely positive. Plus, there are a slew of reforms measures which the government has announced and there are more, in terms of the bankruptcy bill, among others. The reform agenda is on track, though there could be minor hiccups here and there.

How do you expect economic recovery to play out?

In the next two to three quarters, a lot of downgrades will have to get digested. We will see the economic recovery getting priced in. Our Gross Domestic Product growth forecast is 7.1 per cent for this year, followed by 7.6 per cent next year. We are building in a gradual recovery and at the same time, we are taking about inflation being under control. We expect the Reserve Bank to cut rates by 25 basis points as we run into March and another 50 bps from March to December. So, in that backdrop, the economic recovery could start playing out in a couple of quarters.