Indian markets have corrected nearly 10 per cent from their peak levels led by a host of global and domestic reasons. Singapore-based Benjamin Yeo (bottom, left), managing director & chief investment officer (Asia & Middle-East) for Wealth & Investment Management, Barclays, tells Puneet Wadhwa that he expects volatility to rise, especially closer to the US Fed's monetary deliberation meetings. One should not be surprised to see some slowdown in the pace of foreign institutional investor (FII) flows into India in the second half of 2015, he says. Excerpts:
What is your interpretation of the latest statements from the US Federal Reserve?
The focus remains unchanged; essentially their eyes are on the US domestic economy, in particular the pace of improvements in terms of economic activities and labour market. Notably, the Fed cannot deny that unemployment has already more than halved from its recent high and that wage increases could also be in the pipeline.
Our view is that the Fed should start the first rate hike in the second half of the 2015; all in all, we think the coming monetary tightening cycle is likely to be less severe in terms of magnitude and pace, as inflation has yet to rear its ugly head.
Volatility is likely to be on the rise and especially closer to the Fed's monetary deliberation meetings. Thus far, markets have inadvertently been pricing in the first rate hike; and so when it eventually happens, any negative impact is likely to be short-lived and fairly muted, similar to the experience we recently had regarding the taper tantrum in 2013-2014.
The negative impact on India may also be less severe than before for good reasons: fund may not necessarily rush back to the US despite the expected stronger dollar, as the US equity valuation remains at stretched levels; conversely, Indian stock prices have also become fairly attractive after the recent market correction.
What are the likely implications of 'Grexit' for the global financial markets?
Issues relating to Greece's potential default and exit from the European Union (EU) are not new; to a certain extent, they might have become red herrings in the making. In fact, recent surveys suggest that increasingly, the likelihood of a 'Grexit' has increased, as the consensus view is that it could happen over the next few years.
Suffice to note that the outlook for the region need not be dependent on what happen to Greece. In fact, the implicit support from the European Central Bank (ECB) remains key, in terms of easy monetary conditions. Thus, amid the noises emanating from Greece, there are already visible green shoots of economic improvements seen in the recent EU data releases, which bodes well for the regional and global economy in the coming quarters.
How does India appear as an investment destination? Do you see the pace of foreign institutional inflows slowing in the second half of 2015?
The effective implementation of these structural reforms is not a one quarter or one year phenomenon. After the initial euphoria, dust has settled down and investors are beginning to expect any concrete measures and improvements to be made by the Modi government. Undoubtedly, there will be disappointments and markets will correct. However, as long as investors perceive that the ruling party is still on the right economic direction and track, Indian equity will remain attractive in the medium term to investors.
Alongside current criticisms of the ruling party in terms of deliverables and the surge in interest towards Chinese equity in recent months, one should not be surprised to see some slowdown in the pace of foreign institutional inflows into India in the second half of 2015.
Although it is not exactly a paired trade between China and India, at the margin, some funds may be diverted out of India into China, especially for those funds that have been overweight in India and underweighted in China - this should not be interpreted as a reversal of recent institutional inflows into India.