India is one of the best plays among emerging markets, as global investors do not have too many options in this space, feels Dharmesh Mehta of Axis Capital. He says investors are slowly turning neutral to overweight on India, from their earlier stance of being underweight.
Indian indices have rallied sharply over the past few weeks, as they try to catch up the uptrend in other emerging markets. But for the calendar so far, they have been trailing other emerging markets.
Mehta said the recent inflows are coming from exchange traded funds and India-dedicated funds.
Mehta says there is a likelihood of India’s sovereign ratings being upgraded in the coming weeks. The Finance Ministry had recently met up with rating agency Moody’s to make a case for India’s rating upgrade.
On interest rates, he is not sure if the stage is set for a sustained downtrend. Mehta sees monsoon and commodity prices as being the next key triggers for the market, and expects political uncertainty to persist.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: We had some big inflows yesterday from FIIs. What’s the sense you get when you speak to them about the fresh deployments that have happened in the last few weeks?
A: Well obviously when you are away from India you get more bullish on India than when you are in India. However yes, people think that if the interest rate environment turns downwards for India, India is the biggest beneficiary. There are not too many other countries where in you can park big money right now in emerging markets.
If MSCI weightage has changed for India which is expected to go up by two percent on June 10 or 11, people are pre-empting that kind of a weightage change and started putting money into India. As you said, they were underweight India so now they have to come back to make their weightage neural or overweight on India.
So, one is just benefiting from that. Another factor is that there is not a huge paper supply available in the market right now except few offer for sale (OFS) deals. The kind of money which is chasing the country right now, the supply is not enough. It’s a demand supply mismatch which is benefiting India today.
Q: It has been a fantastic month in terms of money flows though. What are you picking up over there in terms of flows and what kind of money is pushing back to India again. Is it the Exchange-Traded Fund (ETF) crowd that’s heading back or only long investors interested in the market after getting these macro details?
A: The colour of money is green and that is what everybody likes any way. I think it is a mix of both. One has got the ETF money coming and with that one is seeing some kind of inflows coming to India dedicated funds because people are looking at India as a destination to invest for the next two years.
So, one is seeing some kind of money coming in, but the numbers on a daily basis are not that large of what foreign inflows are coming in. It is purely because there is no supply and there was a gap. That is the reason why the impact cost is so high that even a small trickle of inflows are impacting the market in such a big manner.
Q: Would you say that yesterday’s rally was stoked by expectations of that interest rate cut after the Wholesale Price Index (WPI) numbers that probably was the prime driver?
A: Today's move is more on the expectation that the RBI will cut interest rates as inflation is trending downwards. Whether we will breakout to new highs or into a new territory? It will all depend on a lot of events which are going to happen in the next few months. Monsoon will play a very important role in that breakout, whether we have a great monsoon or a bad monsoon.
Similarly what happens to global commodities, whether gold and oil continue to go down which is good for India especially for the current account deficit situation. So, those are the events that will play on which basis one will see a new rally if at all happening. It’s too early to predict on that. Right now we are just benefiting of the global flows which are coming right now in India\\'s way.
Q: What about growth? That’s the other thing which global investors have been fretting about in India. Do you think these expectations of interest rate cuts will tie in with expectations of growth picking up or earnings picking up over the next few quarters?
A: We are still in early stages of interest rates going down. Commodities have just started falling in the last one month. So, the growth doesn't come immediately because every corporate is going to wait and watch if these fall in commodities is sustainable and whether RBI will aggressively cut rates.
If one looks at RBI's statements, they are not looking to cut rates in a hurry. It is only the markets, which have gone up expecting that to happen. However, it is not the statement from RBI few weeks back we are going to cut rates aggressively. So obviously people are going to look cautiously and take one step at a time. Growth will come back, but it is going to take some time. It’s not going to happen in the next one-two months. However, the markets will always run ahead of its time, pre-empting is going to happen.
Q: We had a pretty disappointing parliament session though. On that accord in terms of politics and the uncertainty there, is that a big deal to the minds of people investing in India?
A: There are a lot of speed breakers and one of them is politics. People get very frustrated reading everyday about India. So, the India perception has gone down drastically in the global world. Obviously politics is something that people are frustrated and unhappy about, but that is not the important point for them to invest or not invest in India.
If somebody is taking a longer term view, he will definitely know that there is a new government coming in 2014. So, he has to tide over this small hiccup, which may keep on coming and markets may continue to rise if other things fall in place. This is more important fundamentally for India rather than just politics.
Q: If your call is that there is more to this liquidity push for the market, tactically how would you play it? Would you start positioning yourself in high beta because that’s the space that really performed yesterday? How would you do this sector wise?
A: It will be rate sensitive because the general consensus is that commodities are not going up in a big way. If the valuations of these interest rate sensitive stocks are being beaten down and even though they have come up in the last few weeks, it is still much cheaper than all the consumer stocks.
The risk reward ratio is in favour if we have good monsoon. One doesn’t need a drought which will again impact the rate sensitive as it limits RBI to cut rates going forward. So, there are too many ifs and buts right now. So, it is better to be stock specific in those kinds of sectors where the upside is humungous and downside is limited.
Q: After yesterday’s breakout, would you say that the Nifty is shifting to a higher price band or you wouldn’t jump to that conclusion yet?
A: I would say it is still very volatile and it is very early to pre-guess all these things. Especially, when you are getting into such eventful months wherein you have monsoon as well as global commodity situation. I wouldn't say that right now we have entered into a new territory. Yes we are on the positive side, but this could change in a week if something happens to global commodity cycle. If the commodities even go in 10-20 percent higher, people will start panicking.
So, it is too early to build in a new band for the market. One has to be very cautious. It is important that you go stock specific rather than a macro player on India.
Please note that we are going up on smaller volumes, so there is not very large inflow which is pumping up this market. It is just small amount of money which is trickling in and pumping up the market because market is short of sellers now. Let’s not get carried away by this rally and wait for events to happen.