FIIs must to boost Indian trade; upbeat on Asian mkts: Citi

The markets are reasonably positive and that is reflected particularly by the developed market equity bourses that recently closed to their all-time highs, says John Woods of Citi Private Bank.

Global markets advanced on Tuesday, with the Dow closing at its all time high and the S&P 500 trading within 2 points of its all-time peak, recovering from steep losses last week. Also Read: CPI inflation to moderate to 7% by Mar '14: Morgan Stanley Meanwhile, Asian shares edged higher on Wednesday as Chinese trade data signaled recovery. Woods, therefore, expects some rotation of funds from the developed markets to the emerging markets sans Japan in the second half of this year. As far in India is concerned, he feels unless the foreign flows start returning back it is difficult to see the Indian market picking up aggressively. “We are biased and are leading much more towards North Asia than Southeast Asia and India in general,” he says in an interview to CNBC-TV18 Below is the verbatim transcript of John Woods’s interview on CNBC-TV18 Q: What have you made of the various signals on the global market landscape with specific reference to Asia? How do you think the next few weeks will shape? A: There are a lot of concerns over short-term event risk like bird flu, North Korea, the potential spill of liquidity into Asia from Japan. However, overall the underlying economy is looking pretty robust. We will see some summer slump in the second and part of the third quarter, as we have done for the past 3 or so years. Overall, the markets are reasonably positive and that is reflected particularly by developed market equity bourses that closed to all-time highs, recently. Q: We are hearing reports of outflows, the markets have been underperforming, how would you call the emerging market (EM) category now? A: We will see a rotation into EMs perhaps in the second half of the year. The liquidity from EMs in general and Asia in particular has been attracted to developed markets based on earnings, based on the lack of event risks and perhaps a more transparent growth platform. However, in the interim there has been a differential opening up in valuations, such that now Asia ex-Japan markets are looking a little more attractive. So whilst it may not be precisely the moment to switch into these markets, I do expect to see some rotation from developed to Asia-ex over the course of second half of the year. Q: What are you hearing about the fund flows? Money is being pulled out and rerouted to performing markets like Japan and the US, are you looking at the fund activity? A: We look at the funds flow data on a weekly basis. It is quite evident that capital has been exiting the markets that you suggest, and broad Asia as the greater earnings profile, growth platform of developed markets becomes apparent.

Let us not forget that central bank activism has made a sea of liquidity evident in these particular markets, where arguably, opposite has been the case in Asia. That dynamic is likely to continue for the next quarter or so. However, into the second half of the year valuations will become so pronounced that we will start seeing a rotation from markets that are arguably getting stretched and are likely to get attracted to better earnings opportunities in the emerging market space. Q: How are you feeling about India after we had a fairly bad start this year? A: India is a part of the South Asian complex and has had a good run in recent years. We are seeing some rotation from India, particularly into Southeast Asia. Broadly though, India is a lot more of a domestic focus, we tend to see a lot more resilience among domestic investors for Indian risk, but conversely less so from foreign investors. So until those flows start returning back to India, it is hard to see that market picking up aggressively. We are biased and are leading much more towards North Asia than Southeast Asia and India in general. Q: Is there a greater risk in terms of money being pulled out more aggressively from India because of the various macro and earnings problems that we are facing right now? A: India's domestic challenges are well-known both to domestic investors and foreign investors. So, a large scale capitulation of Indian investors is unlikely to the extent that its problems are well known. That is not to say that we may suddenly see a new set of endogenous risk factors coming to the market, but it is unlikely. Where there will be a risk is a capitulation of foreign investors for emerging market risk in general. If that were to be the case, then you would see India failing to escape unscathed, and there would be a material sell-off. Catalyst would have to come from external factors rather than internal.