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Strong interest in India from int'l investors: Kotak Mah Bk

Published on Tue, Nov 24, 2009 at 11:57 | Source : CNBC-TV18

Updated at Tue, Nov 24, 2009 at 16:23

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Paul Parambi, Head of International Business, Kotak Mahindra Bank

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The stock market in India will end the year on a good note, believes Paul Parambi, Head of International Business at Kotak Mahindra Bank . In an interview to CNBC-TV18, Parambi said a lot of cash was sitting on the sidelines and that it would support the markets in India.

Below is a verbatim transcript of the exclusive interview with Paul Parambi on CNBC-TV18. Also watch the accompanying video.

Q: What do you see, more flows which drive us even higher by the time the year is out? Are we are looking at a good 2009 finish?

A: What a change the world has seen over the last several months. Clearly, the interest among international investors is very good in India right now and there is a lot of money on the sidelines, which has really missed the current run and which can provide support at different levels. So overall I would expect that the year should close on a good note.

Q: There is a lot of new paper which is being lined up, you have got JSW Energy, NTPC FPO, these are sizable issues which are all stacked up over the next two-three months. You see enough FII appetite for all of that paper?

A: What we are seeing is that investors had significantly missed the entire run up to the market. Risk appetite returned fairly late when it returned it went into overseas bonds, which were providing lower risk avenues for deployment and by then the markets had run up. So you are in a situation where a significant money which is sitting on the sidelines having missed the run up to the market. So while there is significant issuance of paper ahead I believe that the amount of liquidity which is waiting on the sidelines, waiting for market corrections or the market at these levels is fairly significant.

As long as the issuance of price is concerned, there could be appetite for that. As long as the market remain at current levels, does not drop very significantly or does not run away, there could be appetite for the market which can build up.

Q: The track record for some of these primary market issuances has not been great once they have listed. Has that caused a little more caution in the primary markets' space or is the appetite still very large and very robust?

A: The mood is very different from what one saw a couple of years ago where everything was being lapped up because whatever you touched was pretty much making money. The experience from the first few issuances which had come out are really being that. Unless one is very selective and careful there is a chance that one will not make money in this market so I would say that if issuances are priced right then there could be interest if they are not priced right then it would be much harder sailing. So there are two parts of the whole thing. One is fresh issuances and two is investment in the secondary market and both those are very different.

Q: A question on liquidity is usually followed by a question on the dollar. How much of this is happening because of the pressure on the dollar, the kind of interest and money our market has seen?

A: What you have seen as a result of the crisis over the last year and a half is that once the risk appetite has started returning there has been a clear distinction between certain markets and others. In large parts of the world, there is a clear realization that growth is going to come from countries like India, China, Brazil and maybe Indonesia. Therefore, allocation have to go to these kinds of markets so yes dollar weakness may permit cheap leveraging but the play is really one of asset allocation as risk returns.

Q: What kind of money is coming into Asia and in India, is it largely ETF kind of money which is being raised overseas or are you seeing a lot of the traditionally long only kind of players also increasing India weightage?

A: If you have to analyze the inflows to India over the last six-seven months you would find that, let us take the period till end October, out of the roughly USD 15 billion which came into India the India-dedicated funds have roughly got USD 3 billion out of that and that is something we monitor by looking at roughly about 100 India Dedicated funds on ongoing basis. So the remainder USD 12 billion is really either allocation of cash or funds which are either emerging market or global or changing allocation of assets to markets. So that is really the mix that we have seen.

Within the India allocation and within other allocations very strong trend we are seeing right now is one of ETF. That is a segment which post its crisis has really got a shot in the arm because investors are questioning the actual performance of the fund managers and why they must pay additional management fees for performance which has not been forthcoming in the last crisis.

Q: Typically, in your experience is ETF money stable money or is it performance chasing money which comes in and then rides performance and then when the markets give you a bit of a phase of volatility it switches out of the market?

A: The segment as far as India is concerned is fairly new. If you were to currently look at ETFs as a segment of the entire mutual fund industry, take a market like Europe it is still in low single digit right now. So what I see is that those single digits percentages are likely to clearly move up and definitely over a period of time move into healthy double digits. That is really the trend. Now in the short term whether this is initially hot money which can go out again, if you were to look at the characteristics of the kind of money, a lot of the investors in to these kind of funds would be essentially a lot of institutional investors who are really coming into this kind of channel of investment. However, my guess is that the kind of investors who will go into this will get broad based over a period of time as the entire space gets more popular and two as regulations are expected to change in certain places for instance in Europe.

Q: On your point about money waiting on the sidelines though there is an expectation that, perhaps, because of that December will turn out to be a great month for flows. There is going to be a rush to scramble and get into a performing market if anything to prop up the performance or the year end number do you see that happening? Will December, you think, be much stronger than the past two months in terms of inflows?

A: It is very difficult to say something about what is likely to happen in the short-term. I have over the last month and a half travelled right from Japan to Singapore, Hong Kong, UK , Middle East and I will be travelling into the US, what clearly one sees is that the risk appetite is returning. However, it is not the same kind of risk appetite as one saw in markets towards the end of 2007 where there were irrational allocations happening. So it is really a set of investors who are much more positive about allocation but are still cautiously getting in. So there is money which is waiting on the sidelines which will seek to come in. Whether it will rush in to come in before December is much harder to say, but my guess is that there is money waiting on the sidelines and that provides decent support to the markets.

Q: The trend one sees in terms of fund flows over the past couple of months though is that it is being more emerging markets-centric rather than Asia focused. If there is this money to be spend in markets, do you think it is more likely a Brazil, Russia, India, China will get it?

A: That again is very region specific and what they are doing. So there are certain parts of the world which have, so what you said by and large is correct. It is emerging market play as opposed to a pure Asia play. So emerging markets, therefore, would and the countries which potentially could be of interest could be some of the countries which you mentioned which has large domestic economies as well such as China, India, Brazil. China has got a disproportionate part of that attention but we find that in certain regions investors are already significantly invested in a market like China so money can flow to other markets as well.

Q: Just going by evidence, what is your gut feeling of how much of this USD 15 billion that we have got in this year is actually dollar sensitive which may actually see some pressure of withdrawing from India in case the dollar rebounds sharply?

A: I really do not have an answer to that question. As to where, what the sensitivity to dollar could be. If I were to look at the dollar equation what one has been seeing internationally is significant play on the dollar vis-�-vis a variety of other kind of asset classes. If you look at Indian debt trader overseas that has been a great dollar play or if you were to just look at pure bank deposits that has been a great dollar play where you have seen a dollar carry trade happening where banks have lent in dollars and invested in to bank deposits in various parts of the world. So those kind of trades have been great dollar trades and some of them have been hedged, some of them have been left unhedged so those are the kind of trades which I see happening less and less because clearly the arbitrage between international interest rates and definitely the dollar interest rates and those prevailing in many other parts of the world have started narrowing. That has clearly has been the dollar trade which one has been seeing significantly.

Q: What have absolute return funds or hedge funds which you track been up to? Has the net long position of most of the hedge funds gone up significantly? I am just trying to access what kind of technical risk this market might be prone to in case there is some kind of volatility again in global equities?

A: If you were to analyze that USD 15 billion my assessment is that a lot of that USD 15 billion was in the initial period was clearly deployment of cash because many funds were sitting on decent amount of cash overseas, and therefore the amounts, the percentage of their portfolios which were invested in the market was fairly comparatively low. It may be 80-85-90% so just the deployment of that 10-15% cash could be contribute to reasonable part of the FII flows. We have seen that with a USD 15 billion plus now it is USD 16 billion plus kind of an inflow we have seen the markets moving like this that has been aided by factors in India as well.

What is clearly possible is that now with the FII stock being in excess of USD 150 billion if there is any major risk seen on the horizon just return to cash can result in money flowing out. That itself can cause turbulence in the market.

Q: Last time we spoke when there was heightened drama on the P-note issue has that input behind for most investors into India?

A: What we are clearly seeing is that P-notes are back though the overall base of investors coming directly into India is also back. So currently there is no drama around it as long as it is not created so it is there. I do not think it is a huge factor which is shaking things. Thus, I do not think it is such an important factor right now.

Disclaimer:

The views mentioned are not intended as a recommendation or for the purpose of soliciting any action in relation to any investments, or to be otherwise relied upon for any purpose. Investments in India are subject to the normal risks associated with EMs, including but not limited to risk of losing some or all of the capital invested, high volatility, variable liquidity, geopolitical risks, exchange rate fluctuations & restrictions on foreign investors. Invst in India should, therefore, be considered only as part of a well diversified portfolio.