Debasish Purohit, head of equity capital markets at Bank of America Merrill Lynch, says this year has been the toughest for him in the past 10 years. As the markets mature globally, investors are preferring exchange-traded funds (ETFs) over mutual funds. In an interview with Abhineet Kumar, he talks on how the investment horizons are shrinking and what it means for capital markets. Edited excerpts:
There has been a slew of announcements by the government to increase foreign direct investment (FDI) in different sectors. What do you consider the most important one in the context of Indian capital markets’ growth?
From a capital markets perspective, I give far more significance to FDI in insurance and opening of the pension sector for foreign investors and I hope these go through in Parliament. What we lack is depth of the local pool of money in India. For the past 20 years, we have played hostage to foreign money and the local pool has not really developed to the scale that is ideal. Pension and insurance is genuine long-term money; they do not have a very short-term view of how the markets behave. So, it will help the core infrastructure sector in particular and equity markets will have a more stable form of money.
Do you see some recent trends globally, where higher insurance and pension participation has helped capital markets grow?
Australia and Malaysia are doing so well in the IPO (Initial Public Offer) space. Malaysia is probably the most exciting IPO market in Asia this year; the volumes have outstripped Hong Kong, which is a surprise. For a good part of this year, Asian IPOs were trading down or getting withdrawn. Malaysia has been like an oasis in a desert because of a very robust pool of domestic money in the form of pension funds, which has been 70-80 per cent of the demand. Even the Australian market is fairly stable, as it has a stronger local pool of money coming from the pension and insurance sectors. The dependence of foreign inflow is muted here and that is what we need to change in India.
How do you see the primary markets reviving in the context of policy announcements boosting secondary markets?
Primary markets are not just IPOs; it is also about blocks, QIPs (qualified institutional placements), etc. In any economic or capital markets cycle, you typically see primary markets coming back with a lag. Initially, what will go on stream are easier trades like blocks and QIPs, where people can take liquidity view on stocks on the existing market price. What you are seeing now are these blocks getting done. I am sure the next one to hit would be QIPs, which is the second form of primary market, where the company tries to raise growth capital.
IPOs are typically the last product to catch on. Their revival would also depend on how sustained the reforms are in the next two or three quarters. Unlike in a block trade, for IPOs you cannot wake up one fine morning and close a transaction. An IPO from start to finish takes four to nine months. We are now beginning to see companies which had earlier postponed discussions coming back to the table with a blueprint. But it will take some time, not until two quarters down, when you will see sizable number of IPOs getting done.
What are your expectation for the policy initiatives to sustain and GDP growth profile to improve?
That’s a tough call. If you go back and trace the capital market behaviour in India, you will find the markets here are perhaps less fundamental and more technical and liquidity driven. There have been periods where we have traded way out of sync with the fundamentals and people have been comfortable around those valuations, putting in more and more money. That is why the Indian market moves in bouts. And, when it moves, it moves in a jiffy. We see the thing when downsides happen.
Like in any other emerging market, India will continue to move in the same fashion: Liquidity-fuelled, technical-driven. Every time the market runs up, people take a seat back and evaluate where they stand on the fundamentals, and that is what we call a consolidation phase. I think what has happened right now is a steroid-infused momentum, a liquidity-driven enthusiasm which is propelling markets.
For the steam to continue, we have to go back to the fundamentals. Which is, do we see the GDP growth rate doing better than five to six per cent in the next one year? Do we see corporate earnings growing in access of 15 per cent in the next two to three years? Do you see the investment climate getting better?
That’s where we are lacking. In the past two years, the economy has been running on the steam of consumption demand. Investment demand has to pick up. That is essential for a GDP growth of over six per cent. Whatever has happened in the last one month is fantastic but that it is just the beginning. That needs to be sustained over the next two to three years.
Why are Indian markets more driven by liquidity and technical factors, rather than fundamentals?
That’s the nature of emerging markets. If your time horizon is 10-15 years, you have to got to stay in the emerging markets, there is no option. But, unfortunately, because of this global meltdown, probably the investment time horizon has shrunk. Earlier, you used to see investors talking about five to 10 years, then the window shrunk to three years; now, it’s a one-year horizon.
So, this means a lot of these flows are volatile. When markets mature, it is very difficult for fund managers to continuously outperform the benchmark indices. And, a lot of this money, especially in the last few years, are ETF-led, and even the retail money globally is going more and more into ETF. And, if foreign investors chase performance, they‘ll move from one country to another, from one asset class to another. They might love a stock but not the sector as a whole. They run on themes, they run on relative valuations and they buy baskets.
That is why the flows are erratic, volatile, and so are the markets. So, the emerging markets will continue to be liquidity-fuelled if there is global liquidity surplus. I think excess liquidity will chase emerging markets.
What are the concerns for the near future? What can go wrong from this juncture?
There are many external factors. Can we control the way Europe pans out? If the US or China slows further, can we control that? No. Will that have impact on India? Yes, of course, there will be positive as well as negative impacts of that. Yes, China slowing will see commodity prices coming down and as we are net importers of crude (oil), it is good for us. But on overall sentiment, it will be negative for us. So, we are hostages to those kinds of global developments.
