FII interest in Indian stocks waning: Franklin Templeton

Even though the macro picture has started to look slightly better, Stephen Dover, international chief investment officer at Franklin Templeton says, there is not a lot of interest about India among foreign investors.

India has seen record FII flows last year, a trend that has continued in 2013 as well. "A lot of those flows were from quantitative easing (QE), flows from exchange traded funds (ETFs) and general flows into the market but not a lot of strategic investors investing in India," Dover told CNBC-TV18 in an interview. Also Read: India to see big flows from Japan, avoid PSU banks: Kotak However, Dover himself is "quite positive" on India over the long-term. He feels India is likely to be an outperformer over next 3-5 years. "We are slightly overweight India right now," he says.  According to Dover, the fall in oil and gold prices coupled with some government movement towards better policy will help reinforce that view. He says political uncertainty is the biggest risk to Indian equities for now.   "We think there is a lot of opportunity on the fixed income side, particularly right now in the corporate side. On the equity side, in the long-term we see a lot of opportunity for local investors, for investors who are looking for specific India investments that would be our India funds," he says. Below is the verbatim transcript of his interview to CNBC-TV18 Q: What is the sense you get about the mood on India when you speak to people who manage money right now in your peer set? A: From a foreign perspective there is not any real view on India. I do not think anyone is thinking of India in the same way that they were 2-3 years ago. That time foreign investors use to ask me about India and I have to honestly say that I had very few questions been asked this year. So, I do not think there is a lot of interest in India. There certainly have been a lot of foreign flows into India this year and last year. I think a lot of those flows flows from quantitative easing (QE), exchange traded funds (ETFs) and general flows have been there in the market. However, not a lot of strategic investors will be investing in India. Q: What has the nature of those flows been because what we hear is that India specific or India dedicated funds are not pulling that much money, it is more an Asia call on emerging market call? A: Despite the view of many foreign investors, we are quite positive on India over the long-term partly. There is not a lot of sight in India. The fall in oil, gold prices, hopefully some movement in the government towards better policy, are all very positive for India. So, we are positive on India. We have a couple of ways how we look at India. We have local funds in India. It is important to note that we have both fixed income and equity funds in India. We do not look at India just from an equity perspective. We think there is a lot of opportunity on the fixed income side particularly right now in the corporate side. On the equity side, in the long-term we see a lot of opportunity for local investors. That is for investors who are looking for specific India investments that would be our India funds. We are quite positive on India over the longer-term. We really think over next 3-5 years, India is likely to be an outperformer. Then when you look at our global funds, we are slightly overweight India right now. Q: How do you feel about the global backdrop right now, specially the developments we have seen in other asset classes like the fall in gold prices and the tempering of crude? A: The numbers I am going to give you are numbers in the US. I think these numbers are probably relevant for the world but they are US numbers. If we were to look at total net flows into equities, it is about USD 250 billion last year. However, all of that basically comes from two sources, corporate reinvestments and ETFs. Corporate reinvestments number is about USD 450 billion and ETF is about USD 100 billion. Adding those together you get a net of only USD 250 billion, it means that every thing else is negative. So house hold, pension, insurance has actually had outflows from equities not inflows. At a household level we do not see inflows into equities. A lot of the flows into equities globally have been corporate reinvestments or ETF money. About half of the flows into the equity market, aside corporate reinvestments, this last year has been ETF. In the emerging markets (EMs) it has been about a quarter of the space. So India gets a share of that because that is how ETFs work . Q: Moves across global equities have been quite synchronized off late, it seems the liquidity is helping all markets, do you have a global macro call on equities as an asset class for the rest of the year? A: We are generally positive on equities globally. There is certainly a very strong backdrop with the monetary easing happening. We think that the Japanese easing has been one of the primary reasons why we have seen the recent uptick in the equity market. In terms of the EMs specifically, they have generally underperformed although there have been some exceptions to that. However, China and India have underperformed. So a lot of what is going to happen in EMs is going to be dependent on a continuing flow into equity markets generally. We think EMs are likely to catch up, outperform over longer-term as there is some price adjustments for China and then specifically with India. We think that probably India has had a trough and that it is likely to recover and be positive over next three years. Q: In your India view, how important component is the currency? Do you have a view on the rupee? A: Primarily, we are bottom up investors and we do not put a lot of focus on the currency. But certainly as a foreigner we have to take into account the rupee as well as other EM currencies. So, I think there is a few ways to look at that. One is not to measure just against the dollar because most of our investors are outside of the US. They want to look at relative to their own currencies. If you look at the futures market, I think it is fairly positive for the rupee at least over the short-term. In the short-term we are not worried about the rupee. But if inflation remains high, it’s likely over the long-term that the rupee is going to devalue versus at least the US dollar. I think what is the global issue right now is the big change in Japan. Japan and Japanese yen have been the big shock absorber for the other currencies, which has now changed. I think it is really making a big difference in global market, currency market and investment market. First of all as a shock absorber, if there were any place that I would think would be most affected by Japan is going to be Europe and specifically Germany, which has benefitted from the high Yen. However, I think that the monetary flows in Japan are suggesting Japanese investors to move out of Japan and move into foreign instruments. I think that is and will continue to be seen around the world and will affect EMs as well. Q: Tactically how would you approach India right now in terms of which sectors you would want to be underweight or overweight on as also whether you think fixed income is still a great competitor for equities? A: I think that in India, like I said, you need to look from the perspective of both fixed income and equity. So we see value in corporate bonds and gild. So, I would not move completely to equity but I think that if you are a long-term investor, you want to accumulate your equity holdings. There is a concern if the monetary easing stops. I think that could curtail foreign flows into India but I do not see it stopping so I do not see that as a likely risk but it is a possible risk. Clearly, if oil prices and gold prices start to rise, that is a risk for India. However, I think the biggest risk for India are internal risks. Political risks in India is pretty high and on the other side I think the political opportunity in India is quite high too. I think that if India again is perceived as a business friendly growth oriented country then that will likely attract a lot of foreign investors. Foreign investors are very hungry right now for a good story. India long-term can provide that.