FII outflows will taper from hereon: HSBC

Six months after the downgrade, HSBC continues to remain `underweight' on India. Speaking to CNBC-TV18, Herald Van Der Linde, head of Equity Strategy, Asia-Pacific, HSBC said for the first time, valuations are in line with what is reasonable for the country and India may appear attractive once again.

He expects more outflows from the Asian region. But says, in comparison to the rest of the region, outflows from India has been relatively less. He believes there will be a slowdown in terms of FII outflows from hereon, which is a positive. According to him, most FIIs do not have many options in Asia, as China, Korea, Hong Kong and Taiwan no longer look that attractive.
He warned that current account deficit will continue to remain a major concern for India. Also Read: Rupee hits all-time low, breaches 61/USD Below is the verbatim transcript of Herald Van Der Linde's interview on CNBC-TV18 Q: You have downgraded India to an underweight, what does that come with in terms of a revised target you may have on the market and what is your prime concern on India at this point?
A: We downgraded India quite some time ago, six months ago. That was on the impression that reforms in India, which would not come through as strong as the market was anticipating. So we are worried about the underlying economy as well and both these two factors have materialized. We are still underweight and I am taking a close look at India because I think particularly in view of dollar-terms if you are a foreign investor this market is starting to look quite attractive again.
Valuations are for the first time in line with what I think is reasonable in India and the optimism is not priced out, a lot of foreigners are taking money out of that market. So I think it starts to take care of more positive boxes. Q: Do you think the ownership factor is corrected though because you had pointed out in an earlier note that the foreign institutional investors (FIIs) do own quite a bit of India and we have seen just USD 2-3 billion outflow after such strong inflows in the last few months, do you think there could be further recalibration on the way down of India ownership?
A: India had seen quite substantial inflows in the beginning of this year. I think it has been about USD 10 billion at one point in time. So the USD 3 billion outflow is just a part of it. India’s foreign holdings have remained relatively strong compared to the rest of the region although if you look at India, you think there is a lot of foreign selling but that is because you look across the region, they are trying to find other large liquid markets, which have something to offer.
China is going through a slowdown and Korea has its own problem as well. So they will make these countries also quite difficult. We are seeing quite some outflows already. I suspect we are going to see slowdown in that from hereon. That could act as a positive action for the market. Q: Wouldn’t the rupee be a big spoiler in that regard, in dollar terms most foreign institutional investors (FIIs) are sharply in the red on their India positions, the rupee is at 61/USD today because of global developments, that may raise the risk of outflows from our market?
A: That is indeed correct. I am not saying that. Although if you think out of that market at this point in time of course in dollar terms, you can buy Indian equities in pretty much lower valuations or cheaper prices. So that helps out a little bit but if you look across Asian markets, there are three larger forces that play. One is this QE tapering and the pressure that puts on countries like India with current account deficit (CAD), Indonesia is another example.
Then you have the slowdown in China, which makes it very difficult to invest in China, Korea, Hong Kong, Taiwan and then you have the spillover effect of what happened in Japan that could marginally be positive for parts of ASEAN. So ASEAN looks okay, but these markets are quite small. So I do see negative factors in India. But as against the rest of the region, there are other parts of the region which are hurting as well and do not look extremely exciting either. So net-net India has been compared with for example China and Korea as long.