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Q&A: Cameron Brandt, Global markets analyst, EPFR Global

'Commodities and energy remain hot bets'

Jitendra Kumar Gupta  |  Mumbai 

Cameron Brandt

Indian fell about 14 per cent since the start of the year till the end of February, led by heavy FII selling — worth $2 billion — but they have risen nearly three per cent since then. The later was partly helped by the absence of negative surprises in the Union Budget as well as some buying by FIIs. In an interview with Jitendra Kumar Gupta, Cameron Brandt, global analyst, EPFR Global, shares his views on the Budget announcements. Excerpts:

What is your assessment of the Union Budget and the impact it has made on investment sentiments among the investors that you track?
At the first glance, it passes the “do no harm” test. It is also getting good marks for the focus on corruption, rationalising the tax system, addressing the fiscal deficit and improving the country’s agricultural base. These are, however, longer-term themes. In the short run, inflation rates and oil prices are going to have a bigger impact.

Given the finance minister’s proposal to allow foreign entities to directly invest in Indian equity mutual funds, what impact, if any , can we expect?
If investors see value they will take advantage. If they don’t then, at least in the short run, portfolio capital will go elsewhere.

How are international funds looking at the emerging (EMs) now given that crude oil prices have emerged as bigger concern given its impact on the emerging economies?

Higher oil prices, obviously, have implications for fiscal balances, inflation and production costs and India’s reliance on imported oil makes it hard to avoid some fallout from higher prices. But coal, of which India has big domestic reserves, remains the key factor in its overall energy picture.

It’s also important to remember that, while events in the West Asian and African region and their impact on oil prices have acted as accelerant, the rotation from emerging to developed markets has been underway since the middle of the fourth quarter of 2010. This is because of the basic fact that months of EM outperformance have created a situation where, for the first time since 2007, investors see more value on the US, Japanese and European equity.

FIIs have been net sellers in the Indian markets? How has been the outflow from the Indian markets, compared with some other EMs?
Year-to-date, it lags China and Brazil and, viewed in percentage of assets invested, is in the middle of the pack when it comes to the top-10 GEM (global emerging market) fund country allocations.

Have international institutional investors started putting more weight on the political risk? How are the EMs, particularly India looked at in the context of political uncertainty in the West Asian and African regions?
They have certainly been reminded that it is part of the investment equation for emerging markets and that, in the context of the emerging markets, there is a very strong link between inflation and political upheaval. That said, foreign investors, in general, have learned the dangers of knee-jerk reactions to events in emerging markets and are sophisticated enough to differentiate between a resilient political structure like India’s and the ones that are being challenged in North Africa.

After inflation, interest rates, scams and now the fiscal and trade deficit, given the high crude oil prices. How are the investors looking at India?
With caution. But, that is true for all EMs. Of more day-to-day concern is valuation, both relative to peers and to the major developed markets, and, to a lower degree, the policy response to the macroeconomic challenges you mention.

Is this the tactical allocation that is shifting out of India or is it serious money going out of India? How do you expect this year to be in terms of FII flows into India?
India is currently seen as an expensive market. So, there is a chance that flows into it may lag. But the overall EM story — stronger growth and better fiscal profiles — remains in place and once central banks satisfy investors that they are on top of (or ahead of) inflation, money is likely to start flowing back into EMs. And, India’s infrastructure story has attracted a lot on interest, at least of the rhetorical kind, so the initiatives announced in the Budget could boost flows into India if the details don’t disappoint.

In terms of sectors, do you see any particular trend emerging in the EM money flow, given the prevailing uncertainty?
Commodities and energy remain hot as both play on growth. With hedges against dollar weakness and with inflation such an issue, investors are increasingly interested in infrastructure.

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First Published: Thu, March 10 2011. 00:42 IST