Debasish Purohit, head equity capital markets at Bank of America Merrill Lynch says this year has been the toughest capital market for him in the past decade. As the markets mature globally, investors are preferring ETF over mutual funds. In an interview with Abhineet Kumar, he talks about how the investment horizons are shrinking and what it means for the markets. Edited excerpts:
There has been a slew of announcements by the government such as increasing 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 will probably give far more significance to the FDI in insurance and opening up of the pension sector for foreign investors, and I hope these go through in the Parliament. What we lack here is depth of the local pool of money in India. Historically, for the last 20 years we have played hostage to foreign money and the local pool has not really developed to a scale that is ideal. Pension and insurance is genuine long-term money, and does 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 the capital markets grow?
Australia and Malaysia are doing so well in the IPO space. Malaysia is probably the most exciting IPO market in Asia this year. Volumes in Malaysia 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 For a good part of this year, Asian IPOs were trading down or getting withdrawn.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 very robust pool of domestic money in the form of pension funds, which has been about 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 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 announcement boosting secondary markets?
The primary market are not just IPOs, it is also about blocks, QIPs etc. Like 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 a liquidity view on stocks on 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.
Revival of IPOs 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 who 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 sizeable number of IPOs getting done.
Do you expect the policy initiatives of the government to sustain? And will the GDP growth profile improve?
That’s a tough call – if you go back and trace capital market behaviour in India you will find that 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. And we see the same in a downturn.
Like in any other emerging market, India will continue to move in the same fashion: liquidity-fuelled, technically-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 5-6 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 investment climate getting better?
That’s where we are lacking. In the last 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 6 per cent plus. What ever 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.
Could you elaborate on why Indian markets are more driven by liquidity and technicals 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 emerging markets, there is no other option. Unfortunately, because of this global meltdown, probably the investment time horizon has shrunk. Earlier you'd see investors talking about 5-10 years, then the window shrunk to 3 years, but now it’s a one-year horizon.
So this means 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 the 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, they will move from one asset class to another. They may love a stock, but they may not like 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? In other words, what can go wrong at this juncture?
There are many external factors. Can we control the way Europe pans out? If the US or China slows down further can we control that? No. Will that have impact on India? Yes of course, there will be positive as well as the negative impacts of that. Yes, China slowing down will see commodity prices coming down and as we are net importers of crude, so it is good for us. But for on overall sentiment it will be negative for us. So we are hostages to those kind of global developments.
