Overweight India, China; FIIs may not reduce exposure: BNP

Speaking to foreign investors, Rauchadhuri says he is getting the impression that many of the macro and policy concerns relating to India have receded.

He expects further downside in commodity prices, and feels Indian companies, whose earnings are linked to consumption trends in China as well as global commodity prices, could be under pressure.

Below is the transcript of Manishi Raychaudhuri's interview with Anuj Singhal and Reema Tendulkar.

Anuj: I am reading from your report. You are still quite bullish on India and you would report a contrarian call, but at this point at this point in time, do you the risk rewards still favours the bulls in terms of the market levels?

A: I would think on balance, yes, because what we faced around the beginning of this year was a clear overvaluation of India, around the beginning of 2015 when compared to Asia ex-Japan averages almost two standard deviations higher than the long-term average. There were also concerns about oil prices and other commodity prices climbing back to their old levels and therefore hurting India’s inflation trajectory, current account deficit and fiscal deficit. And at the same time, we were hearing in both local and Western media that the new administration’s policy initiatives were getting delayed and as a consequence the whole investment recovery hypothesis would get delayed well beyond 2015 and possibly into late 2016 or so on and so forth.

Many of these concerns have been addressed and yes, I forgot to add the concern about deficient monsoon leading to food inflation hike which we were hearing repeatedly about one month ago. But, as a consequence, of what has happened of-late, many of these concerns have possibly diminished quite a lot. Oil prices have again corrected quite sharply and along with that quite a few other commodity prices as well and that is always good news for India. And in the light of what is happening in China right now, we think commodity prices would have far more downside.

Also, in terms of new investments announcements or the decline in stalled projects, we are actually beginning to see the investment improve slightly. We actually interacted with quite a few companies of this region, in China and Taiwan which have announced new investment projects in India. We have seen that from quite a few Taiwanese companies and yes, we understand that these companies are actually quite serious about their India investment plans. So, we think that whole investing climate changing for the better, that may actually happen slightly earlier than what anyone anticipated.

And when you have put all this together, particularly in the background of this massive sharp correction that we had seen in China, it would appear that foreign institutional investors’ (FII) interest in India is actually beginning to come back. If you look at the trading patterns of the FII buy and sell numbers, right from the middle of April, the FIIs had begun to sell India but over last couple of weeks or so, such flows began to be reversing now.

So, yes, I would think in the medium-term, India still remains one of the more desirable markets in the Asian context and as a consequence, we have maintained our overweight stance on India market in our Asian portfolio.

Reema: But it is the China troubles which have caught our attention. As a part of your Asia strategy, BNP was overweight China. Do you still maintain that? Is there a risk of you cutting down or paring down your exposure to China now?

A: In our Asian portfolio, we are still overweight China. We think that the domestic A-share market which have become overextended as a consequence of the massive rally and remember that that massive rally was completely decoupled from economic or company-wise fundamentals. But, the overseas listed Chinese market, which is the Hong Kong listed H-shares, which are at a very significant discount to the A-shares and that offers a good entry opportunity to investors who had earlier lost out. There are good quality companies trading here. Many of these have strong growth opportunities with good corporate governance.

So, we are still clearly overweight on China and we maintain that stance and we think that this sharp correction has opened up an opportunity to select good quality companies in the overseas listed Chinese market.

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Anuj: It might be a buying opportunity from the medium to long-term, but purely in the short-term, do you think things could get a bit ugly? Where do you see the floor for the market now? Do you think there is a good chance that the index revisits 8,000 or would the floor have shifted higher to maybe 8,200 or thereabout?

A: It is difficult to take a call on the very near-term because when you talk about Nifty at 8,000, we are really talking about 4-5 percent correction from the recent peak, which is close to 8,300-8,400. So, in an active and volatile market like India, 4-5 percent correction is not really much given the circumstances that we are living in. If you combine the European concerns and closer home, what is happening in China, then some kind of a correction of 4-5 percent magnitude is not really too unusual.

Anuj: So, let me put it this way - if the market goes to 8,000, would that be a buying opportunity or do you think there is a genuine risk of a slightly bigger correction taking place and the Nifty going to maybe 7,500, not immediately, but over the course of the year and this being a bit of a negative year?

A: As a fundamental analyst it is difficult for me to put an exact number to that level where the market would settle. But, there is something that I would like to point out which is that suppose the market corrects 5 percent or 7 percent; there would be stocks which would correct more than the market. And these are typically the high beta stocks. Which are the high sectors? They are possibly industrials, private sector banks, some of the consumer discretionary stocks and there are good quality companies in these sectors. So, if we find that after the market is corrected, there are good quality growth oriented companies which have corrected more than the market then I definitely think that from a longer-term perspective, they would offer a good buying opportunity.

Reema: Do you expect stocks like Tata Motors to correct over and above the 30 percent fall we have already seen because of concerns in China?

A: I would not comment on a stock individually but, yes, there are a few companies which have direct correlation to what is happening in China and Tata Motors is definitely one of them, in general, if you look at which sectors have been affected or could be by as a consequence of what is happening in China, these are the ones that are mostly concerned with Chinese consumption or Chinese industrial demand. As a consequence, we are seeing commodity prices also declining like oil or some of the hard commodities like iron ore, coal or steel. As a consequence, these material companies all across the region or the companies which are somehow directly linked to Chinese consumption, these are getting disproportionately more impacted than some of the other companies in India. So, as long as this situation does not stabilise in China, we are likely to see underperformance by these strongly linked companies. It is something that we will have to live with in the near-term - I am afraid.

Anuj: What about the larger picture, in your report you write about the FII outflows that we have seen and the fact that they have cut the India overweight, but is the Indian market still over-owned from FII point of view and are we likely to see some more outflows because that impacts the near-term behaviour of the market?

A: Our analysis shows that India is, I mean most FIIs, be it Asia ex-Japan, or global emerging market benchmark, they are overweight Indian right now. They are overweight possibly to the tune of about 3-4 percent compared to the benchmark rates. If you go back about two-three months, then the extent of that overweight was even higher. But, many FIIs have cut down their India position by about 1.5-2 percent and we think that most of them are not really looking at reducing their India position significantly from their present levels. Now, what happens in the very near-term as a consequence of risk aversion is difficult to say because in times like these, there is always a tendency for global assets to gravitate towards the so-called safe haven destination like the United States, for example.

But, at least if one has a medium-term outlook, I do not think most FIIs would like to reduce their India position significantly from here. And that is the impression I got. I was meeting investors in the UK and the European region over the last week-and-a-half and I think the concerns that were voiced about India, about two-three months ago, they seem to have diminished significantly.