Indian fundamentals strong, dollar may have peaked: Experts

Bulls were back in action on Thursday. Indian equity  benchmark closed the day at one-month highs backed by strong global cues. Sensex soared 450 points and Nifty was back to 8200 levels. However, the entire credit for the rally in Indian market was mainly due to rally in global markets.

To analyse the global forces and the way forward for our market, CNBC-TV18 spoke to Nilesh Shah, MD, Kotak Asset Management and Christopher Palmer, CIO, Benson Avenue Capital.

Palmer believes a strong dollar and higher oil prices are usually a worry for global investors investing into emerging markets but the dollar seems to have peaked and oil is trading around USD 51 per barrel, which has led FII flows back into them.

Shah says there is no doubt that the rally seen in the Indian market on Thursday was a global phenomenon but from a macro point of view, India today looks far more attractive vis-à-vis others – CAD is in comfort zone, inflation number looks stable. All these should ensure that the flows from FIIs, as well as local investors’ continue.

Palmer also agrees that Indian market has been less sensitive to global flow because of its strong fundamentals. Demonetisation too might have run its course, believes Palmer.

Shah said, “the month of November witnessed one of the record inflows for domestic mutual fund and last 2-3 days we are started to seeing even foreign institutional investors (FIIs) turning buyers.”

“From India’s point of view, we have a far stronger macro today than before despite short-term hiccups due to demonetisation,” he added.

Below is the verbatim transcript of Nilesh Shah and Christopher Palmer’s interview to Latha Venkatesh and Surabhi Upadhyay on CNBC-TV18.

Latha: Does this feel like 2003 this is a huge global rally that seems to have come out of nowhere, nobody predicted when Trump got elected that such would be the risk-on. Does it feel like 2003?

Palmer: In many ways it does. I think there is quite a lot of catalyst in the market one of the clear ones your earlier speaker just spoke about is that the dollar appears to have peaked. It hit a very important barrier on the Dollar Index Spot (DXY) about a 100 and also oil price USD 51 still appears to be a huge barrier for the oil price and that is even with this Organization of the Petroleum Exporting Countries (OPEC) manoeuvres in the last few weeks – – so two things that investors would normally worry about for emerging markets in global investing with the strong dollar and higher oil price those appear to have a lid on them, which I think is giving the market some comfort.

Surabhi: The Dow already up between 6-7 percent since the November 8 how much more or do you think this is such a ferocious rally that things are just getting started?

Palmer: There is quite a lot of rotation, so when you think about things just getting started, considered the fact that those are sectors now coming into play in the US market which have been out of favour for a long time. Much has been made of the recent bank rallies in the US for example, but some of those banks are now just hitting 5 years highs, in other words it spent 5 years languishing so I think that there is more gas in the tank in the US in terms of rotation and those could be very powerful rotations, because financials for example is a very large in the US and it has been completely off the cards for as long as any of us can remember.

Latha: Things were not going right for the India markets up until yesterday and expected rate cut didn’t come and people are still cutting earnings, because of the demonetisation. What did you take away from today’s huge rebound?

Shah: As you correctly mentioned this looks like a global phenomenon and obviously today there are more buyers than sellers. The month of November witnessed one of the record inflows for domestic mutual fund and last 2-3 days we are started to seeing even foreign institutional investors (FIIs) turning buyers.

Even in a market if everyone wants to buy then prices have no option but to go up despite whatever the ground situation might be, so it is an event where probably shorts have been trapped on the wrong side. The flows have been strong and globally things are supported market rise.

Latha: What have you made of the point that I was asking Christopher as well, is it beginning to look like 2003. The US is performing reasonably well on the economic front, China’s numbers have started to look better quarter-on-quarter (QoQ), commodity producing nations will actually have a much better2017 than 2016 and central banks are still easy – – is this some kind of a goldilocks repeating?

Shah: Quite likely and from India’s point of view, we have a far stronger macro today than before despite short-term hiccups due to demonetisation. The current account seems to be under comfort zone. Inflation despite Reserve Bank of India (RBI) warning that there could be pressure the numbers look comfortable. The fiscal deficit, the finance minister last year honoured its commitment, this year hopefully with some bonanza on the income disclosure scheme (IDS) and Garib Vikas Yojana one could see them honouring their commitment their commitment on fiscal deficit next year as well.

From a macro point of view, India today looks far more attractive vis-à-vis others and hopefully that should ensure that the flows from FII as well as local investors continue. The other thing which we are witnessing is the lower interest rate at the risk of offending some people might say that what you are going to get in one year in fixed deposit, one good week’s return in equity market will delivered next year, just don’t ask which is that next week.

Surabhi: The point on flows, it is all about what foreign money is doing, what domestic money is doing and foreign money left Indian shores in a big manner. In the equity market, we saw almost USD 3 billion go out in November. Now, what is happening to this go long developed market, go long US stocks and perhaps move out of emerging market trade that we saw primarily play out after the Trump win? Has that run its course? This trickle that we have started seeing in December, in terms of foreign investment, do you think it will pick up?

Palmer: Going back to the election, we knew that things would be volatile on the back of the election for flows particularly in exchange traded funds ( ETF ) and those are much bigger players than they were in 2003 or in 1993 for that matter. So, as those ETFs are reacting and ETF rotational investors, multi-asset investors, as they react to something like the post-Trump election rally, there is going to be rotation out of emerging markets where they have a large store of their invested capital is in ETFs. So, it is an easy bid to hit and rotate into US equities. That is probably largely over. Now they are going to have to go deeper into their pockets and start liquidating things like their bond holdings in Europe and other equity holdings they have if they are going to want to play the US harder. The average position amongst multi-asset investors out there and asset allocators now is a pretty uniform modest underweight emerging markets particularly for that reason. So, I would think that that process has run its course.

And India has always looked a lot better than other markets when you have looked at them in terms of their sensitivity to those global flows. So, there were a few headwinds for India, we have spoken in the past about demonetisation and things like that, but those are also beginning to reverse themselves. And I can see in terms of India now, demonetisation has also begun to run its course and you could see a pickup in domestic flows as well which is something that the market probably in India, was beginning to pick up on today as well.

So yes, global flows, that has played its part in terms of ETFs and that fast money. And probably Indian investors right now can look at demonetisation having run its course and a new, some reflation and more importantly inventory rebuilding should begin in India in the next few months and we are going to see some better metrics on that side as well.

Latha: I wanted to ask you if this is going to be as big a global tailwind and if there is any comparison to 2003, will your stock allocation now start looking at globally facing companies? As it is, today it was really metals and other global companies that rose, but will you start looking at those exposed to export markets to kind of find an edge hereafter?

Shah: Unfortunately, from a India point of view, the two big sectors which are focused on exports is IT and pharmaceuticals and both are not going to benefit from the global tailwinds in the first phase. Clearly, in the IT sector, we will have to worry about what will be the new president’s policy on outsourcing and he has already threatened that he will levy tax on those companies which are exporting jobs out of America. On the pharmaceuticals side, clearly, India is facing some challenges in terms of getting approvals from US Food and Drug Administration (FDA). We have seen one of the largest Indian pharmaceutical factory not getting approval from US FDA as was expected. So, clearly, both these sectors, IT and pharmaceuticals will not benefit from the global tailwinds.

The advantage here is that the IT companies are available at reasonably cheap valuation. Many of the Indian IT companies are today available at same valuation as global IT companies and having far better growth. So, at some point of time, both IT and pharmaceuticals companies on a bottom-up basis will be a stock pick, but not because of the global tailwinds but because of the local valuations.

Surabhi: A follow-up to what you said earlier. I believe you said that much of this dollar rally has topped out with the dollar index close 100 and some profit booking of course, taking place today. Why do you feel it has topped out?

Palmer: If the dollar rises too much, that becomes a self-correcting mechanism. Investors will sour on the US very quickly if the dollar were to rise too quickly. And bear in mind that we have seen, just 12-18 months ago, also a rise in US 10-year bond yields to similar levels with the dollar rising to similar levels. So, we have been here before. And I think that that is very important. And at some of the scenarios out there for the euro weakening and the pound, they have not come to pass either. So, we are at a cross roads with the dollar right now where the weaker currencies are probably not as bad as people thought they were and the dollar situation is probably as good as it gets. And from here, we go back to a mid-case for the dollar which should put a lot of relief into the emerging markets and particularly India. So, that one fear factor from too strong of a dollar does begin to recede at this level.

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