FIIs to watch poll result before investing in India: Expert

Foreign Institutional investors (FIIs) will opt for a wait-and-watch approach towards the Indian equity markets before investing heavily into it, says Mark Matthews, Bank Julius Baer.

Also read: FIIs will raise exposure in India if BJP wins polls: CIMB

Speaking to CNBC-TV18, Matthews says he will stick to this approach even if he misses one election rally as the market upside will continue after the elections too.

On the timing on the Fed tapering, Matthews says the easing of the bond buying program should happen next year as the US economy is recovering.

“We do not know how much but it is clear that the quantitative easing did help the stock market. But on the other hand, if they start to taper because the economy is getting better,  then that means more profits for companies. So, on balance I have to think that tapering could have a little bit of a short-term impact,” adds Matthews.

Below is the edited transcript of Matthews’ interview to CNBC-TV18.

Q: How are you looking at AMP data and the fact that on the basis of this preliminary jobs data the yield has gone up to 2.84? Would you see a round of money moving out of emerging markets (EMs) ?

A: It’s been happening already since Bernanke used the famous ‘taper’ word back in May. I do not know if it really matters whether it’s in January or March or June. It should happen some time next year because the economy is getting better and in my mind when the Fed bought USD 3 trillion worth of securities, as it has been doing over the last five years, some of the money that loosened up because other people were selling as it was buying, had to go in stocks.

We do not know how much but it is clear that the quantitative easing did help the stock market. But on the other hand, if they start to taper because the economy is getting better,  then that means more profits for companies. So, on balance I have to think that tapering could have a little bit of a short-term impact just like it did when we started to price in during summer and then they changed their mind in September.

Q: Give us a word about how it might affect India. At that time, on May 22 when the famous taper word was first used, the outflows was from emerging market debt funds. In India it was very clear the data now show USD 6 billion flowed out of debt funds, hardly anything flowed out of equity funds, precious little perhaps, one-sixth of that. At the moment there is very little of global money, FIIs money in Indian debt, so would you say that India would escape the blushes because even now it will be debt outflows or will it be equity outflows out of emerging market?

A: If the tapering is occurring because the economy in the United States is getting better then that creates more profits for American companies. However, that doesn’t necessarily mean that Indian economy is getting better. What we saw in the GDP which came out a couple of days ago shows that the Indian economy is troughing. So, just because the US is getting better doesn’t necessarily mean India is bad and then of course there is the very important election coming up. So, it kind of depends on what is going on here as well and on my sense is what is going on here is better than it was six-twelve months ago.

Q: The election is the big word in our market. It has become a bit of frenzy, everyone is expecting pro-business party to come into power and take the market to new highs. How are foreign institutional investors looking at India with election trigger in mind?

A: India reminds me a lot of where Japan was exactly a year ago because exactly a year ago it looked like Shinzo Abe would win the election and of course he did and when we did, the Nikkei went on to another – up about 40-50 percent from where it was. So, it had already gone up expecting Liberal Democratic Party (LDP) victory and then it went up.

For me, as a past observer, I do not come here often but all I can say is that my Indian friends voiced a lot of dissatisfaction the way the economy has run over the last five years. I think they might vote for the Bharatiya Janata Party (BJP) but I do not know where the other 1 billion people in the country will do. So, I am going to wait and see what happens with the election and if I miss a big rally, I still think there will be upside after the rally after the election.

Q: Would that be how the broad set of funds would think, would they wait for the actual results. I guess hedge funds would top up?

A: My guess is that some people will probably buy a bit first and if they are wrong then that’s too bad but most people I believe will probably be more like me and wait to see what happens.

Q: You said you expect more upside to the Indian markets in 2014?

A: If the BJP wins. If it doesn’t win then it could be a different story because we are pricing in victory as we speak so I prefer to wait and see.

Q: What about India versus China. Do you expect some incremental money flow to go to China at the expense of India or do you think both markets can do well from here?

A: Six months ago, both of these economies and markets were in the doghouse and now suddenly they are in the limelight and both of them for their own unique reasons; India because of its impending elections and China because of the reforms that were announced at the third party Plenum a few weeks ago.

However, both also have shown us economies that have bottomed and are now picking up. So, on balance unfortunately the preference is for China among investors globally. One reason is, its cheaper; its about seven times and India is around 11 times price to earnings. Even if India is cheap, by historical standards to its own pricing, China is still cheaper and then somehow and I do not know why most investors tend to prefer China because they see Chinese companies in more parts of the world and more of a contributed to the global economy. I am not sure if that’s the right way to view it but right now the preference is for China.

Q: Now that you know how the US data seems to be panning and you have an idea of taper in your mind. What would be your asset allocation in the first three or six months of next year? Developed markets (DM) versus emerging markets (EM) and within EM what is the ranking?

A: We do have an asset allocation. We are very overweight on United States and Europe and we have little exposure in EMs. We added a bit for the first time, a few months ago and the reason is simply that if the developed economies are getting better, which they are, and that includes Japan, then there is less of a reason to be in the emerging economies. This reminds me a lot of what happened 20 years ago when the Fed started to increase rates in 1994 as the economy was getting better and that was the peak in the great bull market of Asian stocks in the late 80s early 90s that stopped abruptly at the beginning of ’94. Post that the US had a big beautiful bull market and that is what is happening now and should continue to happen for the foreseeable future.