The Hindu Business Line : Market View

In the past month we have seen both bouts of euphoria and volatility, in our view this reflects the acceptance of emerging market equities as an asset class and also some unfounded concerns on impending regulatory actions. FII’s in a rush to participate in the now well accepted India growth story have used various techniques for investing in India and some amount of leveraging through Participatory Notes. PNs are buy or sell contracts issued by foreign brokerage houses to their clients, who do not wish to register as an FII or its sub-account.

In the wake of various financial market issues faced by regulators worldwide, monitoring the flow of funds through regulatory measures is a widely accepted international norm. It is the effort of the regulators to increase transparency in international flow of funds and avoid both fund flows from unwanted sources and system destabilising speculation. In line with this thinking, SEBI has allowed a time of 18 months for unwinding of derivatives issued on the Participatory Note (where derivatives are underlying). Reading the fine-print of the proposal clearly shows that it is the intention of the regulator to continue the policy of enabling access to Indian equities for global investors. FII’s may take time to adjust/comply to the new norms and therefore there could be moderation of inflows over the next couple of months before they normalise again.

In the future, there is the possibility of long-term fund inflows from pension funds and insurance companies in developed countries, who have missed out on the Asian story so far this decade, and are now facing diminishing returns elsewhere. These are now slowly getting interested in Asia and, when they do, it could lead to large inflows of long term money.

Tata Mutual

Oil prices have crossed $90 per barrel and the dollar is plummeting as money is being circulated from what was once seen as a safe haven towards markets where earnings growth is still robust. The side-effects for the US could be rising inflation, both from fuel costs and a depreciating dollar.

Liquidity remains abundant and capital flows are being directed in a much faster fashion to find a home where currencies are appreciating. As we mentioned a few weeks earlier it sets the tone for the ‘dollar-carry trade’ which is likely to fuel markets in Asia. Why Asia? It is a simple process of elimination. The US, as we have already discussed, is close to 50 per cent of the market capitalisation; Europe, while showing some signs of improvement from a decade of high structural unemployment, is still unlikely to witness strong corporate growth with an appreciating currency relative to the dollar impacting several of its exporting industries.

Japan, despite several attempts to re-discover its glory of the 1980s, is still languishing from weak consumer demand. Latin America is also highly dependent on the US for its exporting industries.

While there will be some interest in Eastern Europe and Sub-Saharan Africa these are not likely to be core allocations for any global or emerging market fund.

The obvious choices could be China and India. They have been for the last three years, at least. When will the appreciation of the markets come to a standstill through sky-high valuations? That is unlikely to be seen in this decade anyway, as liquidity remains abundant and chases investment returns, where access is readily available. Over the next year we expect the Fed will continue to look at rate reductions as the US economy weakens, particularly if oil prices recede and inflation pressures come under control. This will continue to fuel P/E reflation globally, particularly in Asian markets. How far can P/E reflation take us? That is anybody’s guess and it is best to remain invested where growth is visible.

Optimix View And Outlook

It is really notable that prices of almost all assets have been on the rise… equity (strong liquidity), bonds (benign interest rate outlook), gold (weakening dollar and rising demand), real estate (favourable demographics), and crude oil (rising tension in the Middle-East).

News flow on quarterly corporate performance has been decent, despite the high base effect, rising rupee-hurting exports, high interest rates and increasing costs. The growth momentum is on and underlying fundamentals are strong. In the short run the markets are still ahead of fundamentals but, in the long run and as compared to peers, the Indian markets are not unreasonable.

Economic fundamentals, pro-investor market environment and corporate performance are major market-drivers. Besides these fundamental factors, global liquidity is expected to play a major role. Indian economic growth has been good and corporate performance has been above expectations. Analysts believe that the Indian equity market is in the midst of a long bull cycle, but investors should not be carried away by the recent rally, as short-term correction cannot be ruled out. In such market conditions we advise caution on our investors’ part.

ICICI Prudential Mutual

More Stories on : Mutual Funds | Outlook

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page