EMs at risk of incessant FII outflows, govt act fast: Ambit

The Indian equity market has seen FIIs offloading USD 4.5 billion from debt from the Indian equity market. Andrew Holland, chief executive officer, Ambit Investments Advisors says the Indian government needs to start taking swift action now in order to attract capital flows.

Holland's views come in the of Fed chairman Ben Bernanke saying US will taper its monetary stimulus, the quantitative easing (QE), by the end of the year.

The prime reason for this FII offtake was the uncertainty on the QE. However, with Bernanke now making the tapering of QE official, most analysts are seeing removal of FII money to continue. 

This decision on the QE added with crude rallying to fresh highs, according to Holland, will pose a threat to emerging markets (EMs) as flows will continue to shift to countries like Brazil, Russia.
Meanwhile, Holland expects the Nifty to take support bwteen 5200-5500 as the market is likely to correct on news from US. Below is the edited transcript of Holland’s interview to CNBC-TV18. Q: You were talking about an accident in the US bond market earlier. Do the events of last night convince you that, that process may have begun?

A: I was a bit surprised the way markets were rallying into Ben Bernanke’s speech because we were all hoping that he was going to be a little bit more neutral-to-dovish on what he was going to do. But he is very clear that United States (US) growth is expected to rise. I have seen research saying that some of those targets could be met by the end of the year. So, the markets are going to start thinking about the tapering at the back-end of the year, not before rather than wait till June 2014. Hence, it is clearly dollar positive, that is for sure. It is also very good news for the crude prices and that is bad news for India. So, expect crude prices to tick up.

The one bit of good news from this is that usually, when we see these things happening, the government starts to step up and try to do something. But talking is over now and action has to take place and it has to be action which is structural in terms of attracting capital. It can't just be – just to kind of get a few projects and get them kick-started. One needs to attract foreign capital now and until we see that the rupee is going to remain under pressure. Q: Anecdotally and historically, periods of this kind of uncertainty usually lead to flows going back to the mother market. Do you expect that to happen in large droves now or do you think some of that readjustment has already happened through the course of June?

A: No, I don't think any readjustment has happened. What one is seeing now is again a clear distinction that money is going to move into US equities, probably quickly followed by Japanese equities because the other trades from the US dollar is a weak Japanese yen and investors will then increasingly look towards Europe as they got the third leg to place the money.

So, for emerging markets it is going to be a very difficult time and the trade will be that one of the emerging markets (EMs) in terms of the policies to arrest the currencies will be a misstep by them. We saw the Bank of Indonesia raise interest rates last week. So, some of this will obviously have an impact for India in terms of the viewpoints and we saw Exchange-Traded Funds (ETFs) down two-thee percent yesterday. So, if it has been ETFs money coming into India then when they sell, it is going to be the index stocks which take a big beating because they just sell and it does not really matter to them, so that is the concern. On has seen hat has happened with just USD 4.5 billion coming out of the bond market. If we have a similar action in the equity markets, then apart from LIC there is no one there standing and buying. Q: A lot of people this morning are making a point that India’s macros are not as bad as its regional peers. But do you see any one making that discerning difference between India and another emerging market especially in the context of how poor our policy has been so far and what is happening with our twin deficits?

A: In the past year and even most of this year, India has attracted flows because it has been the cleaner shirt in the laundry basket amongst emerging markets and that continues to be everyone’s mantle. But when one has fears about, say Turkey or other high current account deficit (CAD) countries, this will have an impact for India and unless the government stops talking and takes action then there is nothing really to fall back on. If one speaks to any corporate they say that the government is just doing nothing and my concern also with the currency is that most of the debt taken recently, 40 percent of the debt of say the Nifty companies has been taken in US dollars offshore. Hence, it is going to have a bit of concerns of the reporting in terms of their earnings and they are also going to have to pay higher interest on this.

This is an adjustment that will have to take place in terms of our earnings forecast. So, I think probably 10 percent earnings per share growth this year is likely, rather than the 15 percent I was hoping for at the beginning of the year.

I don’t think this is a disaster for India. I just think we were too used to foreign flows coming in based on global liquidity and now that has changed and when we look back to the pure fundamentals of India, unfortunately they are not looking very good. The government inaction and the longer we see this inaction, the closer we get to elections and the expectations therefore will start to fade as well. So, we have a very small window of opportunity to do something about it.

 

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