India likely to get very good FII flows in Nov-Dec: Quant

A: October typically is a weak month for the emerging market flows. Historically, we have seen outflows in October but India per se we have seen outflows from FIIs taking money out of India. However, as I mentioned couple of weeks back on your show that it is an aberration and I do not see this trend to continue for long. It is a short-term thing that has been happening in the market. The market also corrected by 3-4 percent and going forward that money will come back. November-December are very good months for FIIs flows in India.

Q: Your Note says that developed market equity funds saw marginal inflows in the third quarter. That didn’t seem to be the experience if you looked at the way in which stocks lost. The S&P 500 fell from 2,010 and that was the high and came down all the way to 1,850. Was most of the selling therefore, in October not in that second quarter?

A: Second quarter was one of the strongest months for developed markets and in Q3 2014, the inflows almost dried up in developed market. The primarily reason for that was lot of outflows happened from Europe and intermittent outflows and inflows from the US.

There was no clear trend in US but in Europe we have been seeing consistent outflows and that continued in October. Week ending October 15 saw the highest outflow from European market close to USD 5.7 billion.

Another important aspect that we should focus on US is that the margin debt level in the US is almost at an all-time high.

The figure for August was USD 463 billion which is the third highest in the margin debt series that New York Stock Exchange (NYSE) provides. On top of that the credit balance which is the money that investors owe is at USD 183 billion and the last time we saw such a figure was in 2000.

Q: Are you giving us all this data to make a point that the markets are seriously over bought and they might remain a little lackluster in Q4?

A: Fourth quarter will be lackluster for developed markets. In developed market majority the fund you see that flows move towards the bonds and when I say bonds it would be government bonds and total return bonds in US that will be attracting majority of the inflows.

On the equity side, US in particular, investors have to be very careful because margins at that level are very high. The last time we saw these debts levels was in 2000 and 2007 when the markets corrected very sharply.

Even now the S&P has corrected significantly in last few trading sessions except last Friday when it was up.

Global investors who focus on US should take this correction more seriously in terms of more correction in the US. We feel investors should completely avoid Europe. November-December of the last quarter of this calendar year will be good for emerging market with good inflows coming in this segment. India would be the biggest beneficiary of it.

Q: You saw USD 2.3 billion in the previous quarter in terms of inflows. What is the trajectory looking like and what’s the reason for low commodity prices and is that an opportunity to buy?

A: Commodity prices made a come back in Q3 2014. But in the last couple of weeks of October we have seen outflows from commodity funds and the weakness that we are seen in the oil market, coal market majority of the base metals have been weak in the last few days.

There will be more weakness in the commodity funds and we are not seeing big outflows but outflows in the range of USD 100-200 million on a weekly basis. That trend might continue for sometime because we have elections in Brazil, South Africa is still looking weak; Middle East is going through its own crisis. So the commodity driven funds across these markets would remain weak in the next few weeks.