Global cues key to Indian markets right now: Rabobank

Latha: Should we understand the fall in Indian shares as an Indian phenomenon or an emerging market phenomenon?

A: I think it is a bit of both. The domestic issues are very well-known. We want to see inflation coming down and we want to see growth going up and at the moment we are not seeing quite enough of buy, there are those trends. However, globally, let’s just take a step back for a moment, market is very volatile at the moment and very confusing but we have two key backdrops and that is that in Europe, we have quantitative easing (QE) going on still and of course QE pushes bond yields up rather than pushing down. We did initially see them going down but eventually remember that the yields have gone up and at the same time in US the Federal Reserve is moving closer and closer towards raising interest rates and of course higher US interest rates and higher bond yields on the back of what is happening in Europe are negative for just about every major economy. So put that together with the specific dynamics of what is happening in India and it is not the healthy as the backdrop.

Sonia: I want to talk about that impending rate hikes a bit; do you think that the recent strength in the US data warrants a rate hike in the month of September rather than December and when it comes what could the ramifications be on emerging markets like India?

A: Our house call is still that the Fed will opt to delay till December rather than going into September although admittedly if we continue to see numbers like yesterday’s retail sales report – that will shift the odds back towards September as we go forward. When and if we do start to see interest rate hikes in the US, it is almost bounced to be negative for emerging markets. If you look back at market history, it almost always is although that of course depends on how rapidly and how far the Fed is prepared to move the interest rate. If we only get 125 bps hikes and then we can have a sigh of relief and carry on pretty much as we were but the Fed rates going up to 1-1.5-2 percent in pretty short order then that is a whole different kettle of fish.

Sonia: So for the rest of the year, what are your own preferred equity markets to invest into?

A: At the moment, I am taking a very skeptical stance because I think with the global backdrop portraying of the Fed moving towards interest rate hikes and bond yields going up anyway suggest to me that one would be well placed about taking some money off the table, unlocking in some profits in most markets.

Latha: Is there no valuation number or Nifty number that you are looking at at all, even when global factors for instance when we went through that massive taper talk in 2013, there came a point where it looked like values shouldn’t fall further, is there any such number, any line in the sand that you are looking at for India?

A: I don’t think there is an easy rule of thumb to be honest with you. It will be nice if there was because we don’t know when to dive back into the market again but I think it depends much more on the global backdrop and so we also have to keep one eye on Europe and another eye on the US. So we need three eyes at the moment.

Latha: We have got some data from people who track global funds very closely and they said that emerging markets saw the largest outflows from their debt portfolios compared to the last 25 weeks. Do you think this only gets stepped up, we are going to see more of this?

A: As we move closer and closer to the Fed pulling a trigger, the impetus is going to be increasing in that direction. What may happen is that they do do that and we finally see what they are thinking in terms of rates, we get the buy the rumour and sell the fact and then we get the relief rally. However, in the near-term if you are looking at the secular trend and you are thinking what has previous Fed rate hike cycles meant for emerging markets, the answer is usually not something good -- particularly when emerging markets in general are seeing rate cuts as India itself experienced relatively recently. On that basis yes people have to take a step back and think, where do I want to put my money and on the sidelines may be the answer temporarily.

Sonia: I heard you mention that you would advice investors to not take positions now and maybe then book out of the markets. For an Indian investor should we still believe that this is a correction in an ongoing bull market or has that bull market theory been challenged?

A: I think you need to direct that question to Mrs Yellen and to Mr Modi; if they can tell you what they both will be doing over the next 12 months so I can answer that question.

Latha: Coming back to India. We have lost about 12 percent from our March highs. Will foreign investors like you see value at current levels or will you expect that – even now the market trades 16-17 times forward valuation, so there is more downside to go?

A: As I said at the beginning it’s a combination of global and local factors that investors will be looking at. I think the global ones take precedence at the moment and until that picture is clarified we will continue to see equities wobble little bit.

In terms of India specific factors, we have numbers today and that in the short-term may change sentiment but we do definitely need to see inflation coming down and we do need to see growth going up.