Our markets will bounce back

The US Federal Reserve’s announcement that it would start rolling back its monthly $85-billion bond purchases programme, commonly known as quantitative easing or QE, later this year, spooked financial markets across the world.

The sell-off was particularly rattling for India because it has been one of the biggest recipients of foreign portfolio inflows; the prospect of an end to cheap money and an improved outlook for the US economy could trigger some outflows.

C.J. George, Managing Director, Geojit BNP Paribas, a leading broking firm, says the situation is not as alarming as made out by the knee-jerk reaction.

When the dust settles, foreign institutional investors (FIIs) would take a crack at acquiring Indian shares, available at about a fifth cheaper than a year earlier because of the rupee’s slide and drop in share prices.

The attractive conversion rate should also boost remittances from NRIs in a big way. Excerpts from an interview to Business Line.

Financial markets have reacted sharply to the US Fed’s move to reverse the QE. Do you think equity market is in for a major downturn? Do you expect FIIs to continue to pull out from India and other emerging markets?

Financial markets have indeed shocked everybody by the knee-jerk reaction to the Fed Chairman’s comment. The Chairman said, “if economic fundamentals continue to improve by year end the QE will be cut back”.

This was known to every one in the market. QE was not intended to be permanent at all. It has been used to improve the fundamentals of the US economy and once it improved the QE was to be discontinued.

The market today is driven by short-term momentum traders and hedge funds which create and spread panic, resulting in extreme volatility.

FIIs may continue to pull out from the bond market if the interest rate differential disappears or when the currency risk is higher than the expected rate of return. We have to live with it. FII withdrawal from equity market is not at all alarming at the moment.

However, due to lack of depth in the market, there will be weakness and volatility in the emerging markets for some more time.

We should also remember, Europe will continue the easy money policy for the medium term, which will partially neutralise the impact of US cut in stimulus.

Do you expect liquidity tightness in the coming days? What level do you think the market will stabilise?

The liquidity tightness in terms of FII flows will continue till the rupee stabilises.

Once the currency reaches stable levels, long-term investors will start investing as there are still a lot of opportunities for long-term investors such as pension funds and Insurance companies.

It is difficult to predict the impact of external developments, but I am sure the Indian market will continue to be one of the few equity investment destinations for international investors.

You will also see investors buying more stocks of the same company which is roughly 20 per cent cheaper compared with one year ago due to the fall in the value of rupee.

I do not find any reason for the market to go down below the current levels other than temporarily wild shocks and bouncers.

What would be your advice to investors?

Investors should stay invested in good companies run by good management and with good dividend payment record. They should not worry too much about the level of the market. It is difficult to predict the market turnaround and once that happens, investors will get more than compensated for the long and tiring wait. At least history says so.

How will the depreciating rupee impact equity markets?

Because of the impact of rupee depreciation there will be re-rating of stocks on the basis of companies’ reliance on imports or exports which is very much visible in the market.

Although there is structural decline in the prices of commodities we are unable to take advantage due to depreciation of the currency.

Today, all assets in India are significantly cheaper than a year ago. In the backdrop of free flow of global finances we will see investments flowing to India again, which will be a big positive for the markets. Of course, the leadership of the country should send a strong and convincing message.

If we are unable to attract FII and FDI capital, it will be more due to our own internal manageable risks. Hence investors must keep a close watch on Delhi.

What is the reaction of NRIs? Do you expect a surge in remittance?

NRIs are like exporters. They are very happy with the increase in purchasing power in their hands. We can see NRIs aggressively leveraging and waiting for remittance once the rupee stabilises.

I expect a 25 per cent increase in the quantum of remittance compared with last year in rupee terms. Unfortunately, bulk of these will get parked in real estate which may be good for the struggling real estate sector.

What impact do you expect on commodity prices, particularly gold?

Gold prices have to come down a bit more and will see strong correlation with the QE cut when it happens.

If US economy improves, dollar will become strong and gold will have to come down at a disproportionately fast rate.

This will also help India’s CAD (current account deficit) in two ways. Gold may lose its charm and hence the quantity of imports may come down along with prices which will eventually help improving CAD and rupee.

If rupee had indeed not depreciated there would have been a crash in gold prices in India spreading risk in the entire financial system due to significant exposure through gold loan companies.

Globally commodity prices are on a structural decline and hence India will be net beneficiary for some time to come.

Do you expect any particular sector to do better?

In the context of potential QE cut, the answer is very clear — focus on companies having foreign currency earnings. The more than normal monsoon this year will be a booster for agricultural sector and the consumer goods sector.

Any silver lining in India based on economic fundamentals?

We need to take into account the good monsoon, which is not discounted by the market.

There is a potential for agricultural sector to grow at a rate higher than the growth of GDP which alone may deliver an extra one per cent increase in GDP compared with last year, besides helping inflation to ease.

There is likely to be an improvement in CAD due to decline in commodity prices in general, reduction in gold imports and increase in remittances and FII flows.

If agriculture grows at a high rate it will have positive impact on inflation and, eventually, interest rates.

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