Foreign investors may return to Indian market soon: Kotak UK

Indian markets have so far enjoyed a sterling run since the Budget but the rally has been driven largely by mutual funds and retail investors.That may, however, be set to change if the view of Nitin Jain, Principal Investment Manager at Kotak UK, comes true.In an interview with CNBC-TV18, Jain said he expect foreign investors to return to the Indian market soon.Foreign portfolio investors have net sold Indian stocks in four out of the past five months. Domestic institutional investors have net bought stocks in each.Jain, however, said that equities are poised for a breather following a breathtaking rally recently even as a sharp decline is unlikely.In an interview with CNBC-TV18, Jain said corporate earnings and GST implementation will be the next big triggers for equities, besides state election results.

He said that the deepening financial services market in India (particularly banking services), increasing return of capital from buybacks and higher dividend payouts, and consolidation and M&As would keep fund inflows strong.Below is the verbatim transcript of Nitin Jain’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.Anuj: The markets have had a one way rally, do you think we are at the cusp of a correction and if yes, how deep would the correction be? A: The market has had a very strong rally and there was no one in the beginning of the year who had talked about such a strong rally. So, the correction can set anytime. So, I think it is possibly due for a bit of a consolidation; there are no two ways about it. It has been a one way journey since the Budget presentation and maybe you can take a bit of a breather here and then look for a reset of the rally post we are getting closer to both the earnings season and closer to goods and services tax (GST) implementation data, I think that will be the next trigger in the market.Of course there is one more event in between which is the election results of the state elections and that could either be a bit of a dampener or could be a trigger for rally. However, in the interim, profit taking could set in a bit. However, I don’t see that as a big sharp decline from here. Latha: Would you say therefore that this will also be just a minor dip, all dips have been bought by the market and this one as well will be? A: I think it is very difficult to predict whether this will be a minor dip or could be slightly deeper. However, I think yes there is a lot of money which is in the market and the corporate results have been better than expectations thus far. Now, as you were saying or the entire old economy pack is faring, so, there is some momentum there in that segment of the market. So, I think the market will look to get support in small dips also; I don\\'t rule that out. So, the new pack, the old economy is now the new driver of the market.Latha: There is a difference in the way in which support has come this time. It has come from domestic institutions. Foreign institutional investors (FIIs) have largely stayed out, they have had more lucrative opportunities abroad. What is your assessment of this domestic money that is coming, people are talking very bravely of an SIP fund, Rs 4,000 crore every month and that is only growing, so, is this a different kind of rally where domestic money because of the way in which real estate and gold and interest rates are is going to be a secular support for this market? A: Whatever points that you have said, clearly will play out. Also, don’t forget that in the last decade or so, the financial services industry in India has deepened quite massively. You look at the private bank network rollout in the last decade; all of these banks have expanded their footprint between 5x and 8x, or even 10x and all of these guys have been hungry for other fee based income. So, a lot of these guys will see the tailwind of the macro favouring investors to get into equity or insurance. So, I think you combine the interest rate decline in the system, you combine the financial savings improvement in the system, plus the footprint of all these banks which have expanded so massively in last few years, you clearly see that at least you would see a steady flow of money coming into the equity market. So, I think that will be a continuous support and add to that the buybacks, the higher dividend payouts. So, there is a lot of return on capital that is also seen after a very long time. Then we are talking about a potential M&As in the market that could release further capital back in the market. So, you are talking about continuous equity support from domestic investors, plus higher dividend, higher buybacks, the foreign investors are a still a bit absent from the market, but I can see that foreign investor may not be away from the market for a pretty long period of time. Anuj: You said about old economy stocks, the oldest of them is leading the market right now, Reliance Industries, but of course with the help of its new economy business. What is your call on the stock now, at fresh 52 week high but still a multi-year underperformer, at current levels is it a buy? A: Don’t comment on stock specifics, but yes, I think the old economy is showing a change by getting into newer businesses. So, clearly there will be some hypothesis which will build-in in what we are hearing about the new ventures and profitability of the same. So, it could be supported well because the market is looking at this as a big change of return on capital from where they were seeing maybe just a week back. So, I think there is a big shift in markets perception on return on capital on new investments. So, I think that stock could remain in limelight for a while. However, it has done its fair bit in the last two weeks, so, I think there could be a bit of a breather. However, as you said, today doesn’t seem to be any breather; it is still firing up. Latha: The broad financial services space, you spoke about the private banks, will that be your space of choice or will NBFCs overtake them, do PSUs have any place?A: NBFCs are doing their own bit, so, NBFCs have become very large in the last few years. In the last session on CNBC, I mentioned that possibly in the post demonetisation era, NBFCs may lose out a bit of an edge that they used to have because everyone will have a banking account, supposedly everyone will have access to financial services, so, the arbitrage of availability or reach that NBFCs were playing will possibly no longer be there as deep as it used to be. PSU banks of course they have their own challenges on the asset quality, it will be good to see if they can resolve that asset quality issues faster than later, and if they were to see that change, I think there is value in that space though I don’t see immediate resolution there happening. So, we are still sticking to private banks as a preferred play in our portfolios. Anuj: Any thoughts on autos, of course it is very stock specific but we have seen couple of stocks go back to the previous highs and at least in couple of companies the demonetisation impact has not been there though last month sales did show some bit of impact in couple of companies, how are you placed on this one? A: I think the auto story is still very powerful. Going by the macro penetration story, there is still a big room for growth in these segments. Also, let us not forget the pay commission related driver of auto segment will stay for the year. The rural economy which was stressed will show back. The GDP data showed that there is good growth in the agri output and we are expecting a reasonable growth in the rural sector this year. So, all of that will play up.So, the lagged impact of demonetisation may see some bit of numbers being a bit volatile in the short-term. However, let us not forget that the pay commission related and the rural economy related uptick will happen in the auto industry. To add, you can also add the lower interest rate which will help the sector to a certain extent. I think those triggers still remain in play. We also like the auto ancillary space, clearly that space, the replacement market is a very interesting market and if post GST regime there is some favourable tax regime which comes in play, the auto ancillary space may also look very attractive. Latha: The IT stocks, Infosys suffered yet another downgrade today from one of your old partners, Goldman. Generally I wanted your view on IT stocks, they have seen a goodish bit of selling, is Trump such a big danger, should we be buying at these levels? A: It is a difficult argument right now in IT. The valuations look mouthwatering, there is clearly this trigger of buybacks which is now setting in, higher payouts will support the stocks. At the same time, the technology spending shift globally is still trending towards newer areas. Indian IT companies are yet to show their expertise or yet to make a big dent. Of course the Trump issue of H1B visa will be a bit of an overhang. I think those issues are there, it is a difficult one. At our end we are a bit underweight that space, but we are looking at this space very opportunistically. If buybacks and higher payouts become a norm, then they will get valuation support and if the US economy were to take a leg up, there could be increased IT budget. So, it is a difficult one. The new angle to the story which has been very surprising to us this year so far has been the strength of the rupee. The rupee has been extremely strong and that is not helping the IT sector a bit. So, I think that is something that can be a bit of a spoilsport in earnings at least in the short term. However, that said, there is valuation support in most of the names. However, we remain a bit underweight that.