Domestic valuations are stretched at the moment and that may have made global investors re-evaluate their risk appetite, suggests Mr Andrew Holland, CEO – Equities, Ambit Capital. But even as foreign investors wait for clarity on policy direction in the upcoming Budget, Mr Holland explains why he is bullish on the long-term growth for India and shares insights on the factors influencing the recent fund flow patterns. Excerpts from the interview:
There has been a reversal of sorts in inflows from foreign investors over the last week. Would you attribute that to high valuations or are FIIs turning negative on India?
To some extent it is a combination of both factors, but I don’t think FIIs are turning negative on India. We have to note that after the big rise post-elections, domestic valuations have become stretched at the moment. Besides, even global markets have run up in the last couple of months. So I think the sell-offs may have been led by some investors taking profits. Moreover, at these valuations, there may not be enough follow through of investments either.
How would you rate the global risk appetite levels for investing in India ? What do you think will weigh foremost in the global investors’ mind?
I think global investors may now be re-evaluating their risk-taking ability. India before the elections was obviously seen as having reasonable growth and now with a stable Government at the Centre there is enough confidence over the country’s long-term growth prospects. But then when you look at the earnings, which haven’t really improved much, valuations look a little high. So, for growth to catch up on the earnings front, investors may have to look beyond FY11 and thereafter. So I think instead of chasing valuations, most investors may prefer to wait and see what comes out in the upcoming Budget and the overall direction the government will give before they take a really long-term view of investing in India.
Regardless of the current dynamics in fund flows and markets, on a long-term basis do you see India’s relative growth story holding up?
With the new Government at the Centre, there are obviously a lot of expectations about them pushing through reforms. But if you look back over the last five years, even though there wasn’t any real reform, the GDP grew at over 8 per cent. So, even if the Government announces policies that are, say, only about 50 per cent of what we hope they would be, there still may be a long-term sustainable growth in GDP. Overall, I am very optimistic in terms of India’s long-term GDP growth.
How do you see fund flows panning out across Emerging Markets and BRIC countries, considering that inflows have drastically slowed down in recent times?
While it is difficult to exactly pinpoint how the trend will emerge, we have to note that there’s already been a huge run-up in emerging markets in the last three months. The developed markets in comparison haven’t really produced the kind of results that the EMs have. That may also explain the flight of capital to developed markets. Besides, there could also be a feeling that developed markets have more room to move up, while emerging markets may have, over the short-term, already run their course. However, in the long run, I feel BRICs as a group will continue to attract long-term investors and in that India may enjoy a neutral to overweight rating.
Which are the sectors you think hold potential and which ones are you wary of?
Our sector choices in the short-term will depend to a great extent on how the monsoons pan out. Obviously if they aren’t good we would be negative on the banking sector, auto and real-estate too. But presuming monsoons are healthy, infrastructure, especially those focused on power and roads, is what will be positive for the long run. Healthcare and education also feature in our long-term investment picture.
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