For FIIs, India is the best in EM basket

That "the darkest hour of all is the hour before the dawn" is an old Irish saying, meant to inspire hope under adverse circumstances. The proverb fits the trajectory of Indian markets and foreigner investors' attitude towards the country over the past year. Around a year ago, when the rupee began to depreciate in May 2013 amidst poor macroeconomic fundamentals and monetary tapering by the US Federal Reserve, it seemed that India had lost the economic plot and risked becoming an untouchable among emerging markets (EM) peers.

Fast forward to 2014 and the gloom and doom scenarios of 2013 seem a distant memory. The rupee is up nearly 10 per cent from the lows of October 2013 and foreigners are queuing to grab a bigger pie of the India growth story.

Foreign institutional investors have pumped nearly $5 billion in Indian equity market since the beginning of the year, on top of the $24.5 billion invested in the 2013 calendar year. In comparison, until the first week of the new quarter (January-March, 2014) EMs collectively had 22 weeks of consecutive outflows from EM funds, according to data from funds tracking agency EPFR. According to various estimates, India has absorbed nearly 60 per cent of all equity inflows into EMs in the current year so far.

MNCs meanwhile continue to scale-up their presence in India, either through projects or mergers & acquisitions.

Experts are not surprised. "Unlike domestic investors, MNCs were always convinced about the medium and long-term growth prospects of the Indian economy. Their faith has been reinforced by recent improvement in macroeconomic indicators and they are positioning themselves to make the most of the next wave of growth in India," says U R Bhat, managing director Dalton Capital Advisors.

For others, emerging markets are now a value buy, given the valuation differential with the developed markets. "All the talk of an emerging market crisis has continued to open up the valuation differential in favour of the former. We see EMs as cheap in absolute terms relative to both itself and against developed markets," writes Markus Rosgen of Citi Group.

The optimism is visible in macroeconomic indicators. India's current account deficit more than halved to two per cent of gross domestic product in the 2013 calendar year from a record high of 4.7 per cent in the previous year, according to figures by International Monetary Fund . In comparison, countries such as Turkey, Brazil and South Africa continue to struggle with high CAD putting their currencies and sovereign ratings under pressure

The difference has been the way the Indian economy and business reacted to currency depreciation. India's merchandise exports grew 5.3 per cent (in dollar terms) in 2013 against two per cent decline in the previous year. Exports including IT services did even better. For example, Tata Consultancy Services revenues were up 16.2 per cent year-on-year in dollar terms in FY14, while Infosys' revenue growth was 11.2 per cent. Import decline was partly due to higher import duty and curbs on gold imports but anecdotal evidence suggests companies and consumers substituting expensive imports with relatively cheaper domestic alternatives.

The adjustment is taking much longer in other EMs. For example Brazil, Indonesia, South Africa and Turkey reported a higher CAD in 2013 than the previous year. The main reason has been their import stickiness and slow moving exports. In all the four countries, imports grew faster (or fell less than) exports in 2013, despite double-digit currency depreciation (see chart on currencies).

"Investors should be very selective about countries, focusing on those that have reduced external vulnerabilities by addressing current account deficits, growth has stabilized and political and policy reform is high on the agenda. We continue to like Indonesia and India on these metrics (though both are obviously now more expensive) where all three components of GDP growth - consumption, investments and net exports set to improve in the short term," says Nick Paulson, head emerging markets, at Espirito Santo Investment Bank.

Then there is the "Modi rally" with investors expecting the BJP-led alliance to form the next government which they believe will be more market and business friendly. "Inflows from NRIs have increased significantly in last few months in the expectation of faster growth and currency appreciation post elections," says Rajesh Saluja, CEO and MD, ASK Wealth Advisors.

Everyone, however, is not buying the turnaround story. With public debt to GDP ratio of around 67 per cent in 2013, India is one of the most indebted countries among its peers. So is the case with consumer inflation in India.

"Don't bet on a quick recovery as yet. The moment the next government removes restrictions on gold imports, ratios will reverse and you could see large outflows," says the CFO of a leading company.

‘Sensex will hit 60,000 over next four years’

How do you interpret the present rally with the market hitting all-time highs? Does it represent a bubble waiting to burst?

We have a significant risk now on this score.

But post-elections, if we have a stable Government, particularly a BJP-led Government, there is a possibility that a new rally in the market will start. In my view, the Indian market in terms of the Sensex has to go to 60,000 levels over the next four years to deliver globally historical returns. If I say this openly people will beat me up but if it doesn’t happen it will prove the 150-year-old recorded history of stock markets in the world is wrong.

Do you think that while expectations have been priced in, the risks have not been?

Yes, I agree. May 14, 2004, was the first major crash in the market in the last 50 years when Manmohan Singh became PM with the support of the Left parties.

On the day of the results, the market went down 15 per cent as it was expecting the continuation of a Vajpayee-led Government. Similarly this time, if the BJP does not form the Government there will be a crash but not necessarily by 15 per cent.

What would be your advice to retail investors?

The market is at a unique low point of a six-year bad phase, and that cycle is perhaps at its bottom. In 2008 it was at 21,000-22,000 level and from that point onwards every year it should have given 15 per cent returns but it didn’t happen. However, once the market revives, it will eventually give that kind of returns. There is no relevance to the view that the market is high and has already gone up, since in real terms the market has not gone up. So, people should take risks and invest their savings in instalments and not miss this opportunity. They should now divert at least 25 per cent of their savings to the equity market.

What changes are taking place in the brokerage business?

Broking firms would have to undergo a structural change in the manner in which they operate because of technology.

Till 2007-08, which was the last bull market, technology was not significantly used. But, today’s generation doesn’t want to call a broker over the phone; they want to trade over the mobile and Internet. Hence, the execution part will completely shift to a technology-driven platform. And since a large number of brokers will not be able to invest in technology that involves huge investment, they will face the issue of survival. They would have to shift from execution to advisory, financial planning or wealth management platform. This has already started happening.

What are the challenges faced by the traditional brokers apart from rising costs and falling revenues?

They face two challenges. They have not been investing in technology, in knowledgeable and well-qualified people to service new-age clients in a complex market. Today, the Indian broking industry is yet to equip itself to give investors advice on when to invest and where to invest. The next generation brokers will make money by acquiring new expertise and skill-sets required to answer these two key questions and help service the new generation of investors.

What are your future plans to grow the business?

We are investing significantly on our mobile trading platform than opening new branches. Over five years, mobile, including tabs and iPads, would be 50 per cent of the market. So, in the next phase, you will not see an increase in the number of branches of broking houses, but a lot of people getting hooked to the advisory platform wherein they will give advice to clients and clients will trade on their own.

Now,IMD Arm Warns of Poor Rains this Year

April-June to be wetter and July drier,says Regional Climate Centre 

India should brace for a weak monsoon season as El Nino conditions are likely to develop,but before rains dry up,the ongoing wet spell will continue until June,weather scientists have forecast,casting a shadow on the rabi harvest and the planting of summer crops such as paddy.

This is not the official monsoon forecast of India Meteorological Department (IMD),but the outlook prepared by the Pune-based Regional Climate Centre,which is a part of IMD.Forecasters from Australia,China,Korea and the US have issued El Nino warnings,but so far the Indian weather office has rubbished the concerns as western propaganda to rattle Indian markets.Monsoon outlook is indeed sensitive for the economy and the market.Although the country has sufficient stock of foodgrain,a negative monsoon adversely affects the entire economy.

In 2009,when an El Nino severely disrupted monsoon rains,India saw a sudden burst of food inflation,which continued relentlessly for years,forcing the Reserve Bank of India to keep interest rates high despite persistent protests by industry.