Apr 25, 2012 03:48 PM IST | Source: CNBC-TV18

FIIs inflows may dip on global liquidity woes: Dalton Cap

Markets are keenly waiting Fed forecast on economic and interest rate to be announced on Wednesday night. The Fed is widely expected to take no action, make no moves towards new easing or significantly change its statement.

Markets are keenly waiting for Fed forecast on economic and interest rate to be announced on Wednesday night. The Fed is widely expected to take no action, make no moves towards new easing or significantly change its statement.

This is increasingly scarring experts as Europe too is not indicating of any liquidity easing measures on the back of upcoming elections. UR Bhat of Dalton Capital Advisors is concerned that unless there is new injection of liquidity the inflows are probably going to take a dip.

"LTRO money has also had its run so therefore unless there is new injection of liquidity in the European markets the inflows are probably going to take a dip," he said in an interview to CNBC-TV18.

However, there are other worries too staring Indian market. Dalton warns that in the absence of adequate policy reforms, the market may suffer huge losses. He also points out that FIIs may flee from India on uncertainties overhanging General Anti-Avoidance Rule (GAAR) issue. Besides, fourth quarter corporate earnings have been disappointing this far.

"I think there is further pain that could come about again as even the market is reasonably priced in, it is not as if it is terribly cheap, it is sort of a neutral valuation territory. So therefore, the downside could be huge if any of these events play out against market sentiment," Dalton elaborated.

Here is an edited transcript of his comments. Also watch the accompanyign videos.

Q: How would you position yourself in the frontlines in the technology sector now?

A: I don’t think the results of the big technology companies have given any cause to cheer. In fact, the guidance has been quite disappointing. Since valuations have corrected quite a lot, I think people still continue to be interested given the state of the market and the quarterly results over the last few weeks.

So I think that is the place where you would probably hide as a result of quite a lot of downgrades. As a result of this, there has been a correction in the market with respect to these stocks. Otherwise, there is nothing much to comment on investing in these stocks as of now.

Q: We have been through a monetary policy, some of the earnings season, global developments, would you say the market has displayed resilience or are you worried about what the next months may throw up?

A: There is a cause for worry next month largely because of the fact that we have the Budget that will be passed and the rules relating to General Anti-Avoidance Rule (GAAR). Therefore, I think there is some expectations on that. Also the fact that the quarterly results that have come till now especially, the larger ones, have been quite tepid.

But I think the big development would be in Europe where we have several elections coming. They don’t seem to point out to the right direction as far as inflows from FIIs are concerned. We have serious problems as far as the French election is concerned. With the austerity measures hammered down, I think this maybe up for further discussion because governments, which have been pushing through austerity measures, have not found favour for the electorate.

The other fact is that the liquidity inflow on account of LTRO two installments has probably played its course. Unless there is further liquidity injection and some amount of certainty as far as the euro land is concerned, I think there would be some issues about FII inflows.


In addition to the local problems we have in terms of policy initiatives and inflation, we still have not seen the impact of potential oil price hikes and tariff hikes in electricity. There is further pain that could come about. Also, even though the market is reasonably priced in, it is not terribly cheap or in a neutral valuation territory. Therefore, the downside could be huge if any of these events play out against market sentiment.

Q: What is the biggest problem with flows now because in April we have got no net inflows at all? Is it the GAAR issue or are these European issues which are halting flows or even the Indian currency which has depreciated so sharply?

A: I think it is all of that put together. The GAAR issue has brought an additional air of uncertainty as far as FII inflows are concerned. There needed to be some certainty on what is a level of taxation. At every level of taxation, there will be certain amount of money that will come because the level of taxation could be anywhere in between zero and 42% .

Therefore, at 42%, there maybe very low level of investment from FII inflows, at zero there maybe very high. Also, the developments in Europe have not taken a turn for the better over the last few weeks. Especially with the French election and the Greek election coming up, I think they might throw up surprises, which might be against the interest of potential inflows. As I said, LTRO money has also had its run. Unless there is new injection of capital of liquidity in the European markets, inflows will probably take a dip.

Q: What kind of downside do you see if some of the European risks become more paramount in the May series, do you still think that 5,000-5,100 base is secured?

A: Given the current level of information, I think that level is reasonably secured. The whole fiscal compact that was hammered down a few months ago in Europe may come to question on account of results of the new elections that are taking place at several places there.

Some governments were forced to resign on account of implementing austerity measures. So I think these issues might call the whole fiscal compact to question. There might be a heightened uncertainty out of Europe, which might result in waning interest as far as investments in countries like India is concerned.

So I think that is a risk that we have to take on board. If that were to happen, the base that you spoke off is certainly under threat. In addition, we also have clarity on the level of taxation of foreign investments that needs to be done.

As I said, you cannot have a situation where someone invests and hopes for the best for the next three years and that is when he will come to know about the taxation he will have to pay. Therefore, if these issues are allowed to fester for too long, there is the risk that the level that you spoke of will be tested. Otherwise, I think this level should hold on.

Q: What have you made of the way banks have chosen to react post the monetary policy? Yesterday, one of the PSU banks actually announced a hike in deposit rates on short term deposits. Do you think the market should bank on any great easing in the second half?

A: Based central bank’s credit policy, it did not look like it is was natural for them to have 50 bps cut in the repo rate. It looked like as if they are only looking at a window of opportunity for cutting that rate. They distinctly said that the upside risk is in terms of the growth numbers. Therefore, it looked like as if that was the only time that they had, when they could probably cut the repo rate.

So if this may not be followed up with further cuts as we go along in the rest of the year, unless there is a CRR cut, which translate into saving as far as costs are concerned among banks, only then they would probably pass on this interest rate cost to the borrowers. Otherwise, people seem to be saying that the only way they will pass on is cutting deposit rates but not lending rate.


Q: On your point about the base being more or less intact, how much probability would you attach to the fact that the market gets all the way back to 5600 or beyond it? How far back would you push that kind of move?

A: For that to happen, I think we need to have Europe back in the reckoning. With the fiscal issue being firmly in place, the election results not throwing out too many surprises and the new government confirming the fiscal compact and the austerity measures that have been hammered out in the past.

In addition, there has to be some sort of certainty as far as taxation measures in India are concerned and some movement in terms of the policy framework whether it is in resources, power, telecom and recasting the finances of the State Electricity Boards. All these things need to happen over the next few weeks or months then I think 5600 is certainly within reach.

Q: Have you changed your view for the rest of the year or do you think it will still be a 10% grind up kind of year at the end of it or do you think more risks have come to the fore? While you might get some return out of equities choosing stocks overall at the level of the market, it will be difficult to generate significant alpha over fixed income?

A: I think it will be difficult to generate alpha over fixed income, no doubt on that. Given the fact that the level of uncertainty has if anything increased, it’s only a very successful outcome the way risk plays out. As I said, when these will fall in place, that’s when we think it is possible for equities to beat fixed income this year.

The risks are much higher. Therefore, we are at a very interesting point where there could be a big movement on either sides. We might get out of that grind of 5-10% band in which we have been trading for quite sometime now.

Q: What is the probability that you may have seen the highs for the year in the rally of the first couple of months?

A: There certainly is a distinct probability of around of about 15-20%. Rest of it is up for discussion, for the events that unfold in Europe and in India.

Q: The first part of the year was also about favoring high beta, rate sensitive sectors basically. Would that strategy change in the second half, is it back to defensives like FMCG?

A: Given the level of uncertainty, it is back to defensives. I think there needs to be some development on some level of uncertainty being brought down for the market to respond positively for the developments. Otherwise, I think given the level of uncertainty that has actually increased in Europe and also in India post Budget, people are very circumspect therefore they would probably wait and watch. 

Q: There is talk this morning of a cabinet reshuffle. How much of a discount you think this market is getting because of all this political worries and the consequent policy in action?

A: As far as the market is concerned, it doesn’t really matter whether there is a change in cabinet posts as long as the policy framework keeps changing in the positive direction. I think that’s all what the market wants; the market wants policy action on the various parameters that we have discussed earlier. That is what I think is important whether Mr. X as a cabinet minster does it or Mr. Y does it, it really doesn’t matter for the market.

Q: Just some quick thoughts on telecom because that space has got knocked back quite a bit post the TRAI recommendations. What's your sense of how to approach big names there like Bharti?

A: The level of uncertainty has increased quite dramatically post these recommendations. But it is worth taking a view that this is the first step and there will be further discussions with the operators and more realistic solution will come up. If that is the view, then they are available at reasonably good valuation. Otherwise, if the whole purpose seems to be that you have to somehow manage to keep the fiscal deficit down by such measures including changing the legislation retrospectively, I think that is not really going to go well with the market.

If that is the view taken, I don’t think there is much value there. But the level of uncertainty has added a new dimension to the telecom sector because there are already high levels of uncertainty with respect to power and infrastructure. Now,we have brought telecom also into the same platform. So I think we need to consciously try and see how we can bring don the levels of uncertainty on several sectors.



Follow us on
Available On