Neutral on India; Fed to taper in Q1 CY14: Citi

Citi is neutral on India because valuation wise there is more value in economies like Taiwan, South Korea China says Markus Rosgen, Managing Director and Head of Regional Strategy. Although India, he adds, continues to be a consensus overweight for foreign institutional investors (FIIs).

He is doubtful of India getting incremental flows from here on. “Overall for emerging markets in aggregate, the flows are still quite small compared to the outflows that we have seen,” Rosgen told CNBC-TV18. On the tapering front he says, tapering by Fed has been delayed, not abandoned and will happen in first quarter of next year. Below is the verbatim transcript of his interview on CNBC-TV18 Q: What is the sense of getting with flows at least in the Indian markets? It is a relentless inflow. Is this still money moving from bonds into equities world over? A: It is not so much money moving from bonds into equities. If you look at it in the US in particular, the money seems to be coming more from short-term money accounts into equities and the big rotation that one is talking about. What you are starting to see in emerging markets is that over the summer people got very bearish on emerging markets fearing the worst. However, since then markets have rallied and people have started to be a bit more willing to participate in the equity markets and hence flows resumed to the positive. Overall for emerging markets in aggregate, the flows are still quite small compared to the outflows that we have seen. Q: You do not see emergence of valuation concerns anytime soon, for instance in the Indian markets valuation concerns to emerge very soon? A: If you were to rank the emerging markets then Asian emerging markets are much more attractively valued than for instance Latin America. Within Asia, you would have India as neutral whereas markets like China, Korea, Taiwan to offer substantially more value and better value than India. Moreover, markets that continue to be quite expensive are markets like Philippines and Indonesia, where valuations are still above their historical averages. So, overall emerging markets offer very good value. As an asset class it is trading close to standard deviation below mean in terms of price to equity (PE) and price to books but within that India is more on the expensive side of the valuation range. Q: Can you throw some more light on what the colour of the money is that has come into the Indian markets. Is it more the exchange-traded funds (ETF) or the hot money as they call it or are long only funds now starting to get interested in a market like India? A: In terms of the flows, they have been predominantly ETF flows and you could call it hot money but at the end of the day money is money. So, people haven’t quite got down to the individual stock allocation. This is something that we are seeing across the whole EM space and not just in India – that is ETFs predominate at the moment and normally the first wave is ETF and then you start to get individual stock picking occurring and that is looking for as the next leg of the market. Q: You spoke of some markets getting overvalued like Philippines and Indonesia and India too in a slightly overvalued zone- do you think this will effect flows now or do you think flows will now come regardless since tapering has been put off? A: Tapering has been put off but your own Central Bank had said that it has been put off it has not bee abandoned. So, at some stage Fed will begin to withdraw some of this excess liquidity and we think it will happen sometime in the first quarter of next year and then people will again focus on those markets that have current account deficits, which makes them slightly more vulnerable. In the near-term what we are seeing is there has been a bit of rotation away from more domestic led equity markets towards more export driven markets and that is why China, Korea, Taiwan have benefited. This is basically to do with the purchasing managers index (PMIs) around the world are telling that the global growth in this environment is getting stronger. If that is so, then people would like to get more exposure to global growth environment and that is one area where India is more domestic than it is export driven is not going to play so well to India’s strength in an environment where global growth tends to be weaker. Q: What do you make of India levels, we could get a rate hike on October 29, and do you think that will disturb the investors? A: If you look at the positioning that investors have in India, it continues to be a consensus overweight amongst foreign investors. So, I don’t think the foreigners are necessarily going to increase their weightings that much more from current levels. The difficultly with the rate hike is that higher interest rates tend to be bad for growth and people tend to buy equities for growth and that kind of reduces the appeal  of India relative to other markets. If you look at within Asia, what is interesting to us is that there still very big underweight by foreign investors in particular, in markets like China, Korea and Taiwan. Even if one tries to adjust for some of these market that have been perennial underweight, it is still very much the case that I doubt India will get that much more flows relative to some markets that for the moment tend to have better fundamental picture.