That the recent rally which took the Sensex past the 20,000 mark was driven by liquidity from abroad is well known. What is not so well known is that even among foreign institutional investors there are different segments. C. Jayaram, Executive Director of Kotak Mahindra Bank and currently in charge of the Wealth Management Business of the Kotak Group, makes the distinction between those segments of FIIs that are bullish on India and those that are not. He also dwells on factors that could trigger a correction in the near term. Excerpts from an interview with Sanjay Kumar Singh.
Is it because insurance companies will sell more traditional products now?
That's essentially the reason. Besides, many insurance companies are rethinking their entire models, bringing down costs, and reducing the number of people. So the overall business will get impacted in some fashion over the next few months.
Why are global and emerging-market funds from abroad coming in at this point of time, given the high valuations?
At these levels valuations are indeed higher than in most emerging markets. That is one side of the story. But the other side of the story is that theoretically there is a defence for those valuations. Apart from China, no other emerging market economy or corporate sector offers the kind of growth rates that India does. So you could argue that there is a case for higher valuations in India compared to almost any other market.
As for why new money is coming into India, at some level it is also the TINA - there is no alternative - factor at work. There is a lot of global liquidity sloshing around. All these funds are looking to improve their returns. If you look around the globe, very few economies offer this kind of growth. So while in the short term you could argue that valuations are stretched, if you have a slightly longer-term perspective, you could still get better returns by investing in India compared to any other market.
What kind of investment horizon do these FIIs have?
I don't think they come in with any specific time horizon. Besides, as I said, there are different types of funds. The India-dedicated funds, which invest only in India, have a longer horizon. The other two, ETFs and global (and emerging-market) funds are not bound by any time frame. They are here at present because at this point of time the Indian market looks better than any other. They keep re-evaluating their options frequently.
Typically, what do ETFs take into account when they invest in India?
ETFs are essentially vehicles structured to give investors exposure to the stocks of a particular country. Of course, investors have to decide whether they want exposure to a large-cap or to a mid-cap index. Once set up they enable investors to get an India play. As long as investors think it is a smart thing to invest in India, they will put money here. The moment they think there is a better market, they will move out of the India ETF and put money in, say, a China ETF or a Brazil ETF.
So it all depends on their macro view.
Both the second and the third category, ETFs, and global and emerging-market funds, depend on the investor's country view.
Do you see the markets correcting in the near future?
I don't know to what extent, but I think there will be some correction purely because the markets have run up so quickly and with such intensity. But when will it happen and what will trigger it is tough to say.
What are some of the factors that could trigger a correction?
Given the fact that a lot of the growth has essentially come from outside India, a global issue would be one of the obvious reasons. We have seen a lot of that in recent history. If there is a problem in the US or in a significant part of Europe, that would be the primary trigger.
The other trigger could be that today we have a current account deficit which is beginning to look dangerous. Normally, a current account deficit leads to a depreciation of the Indian rupee. Today that is held in check because you are getting such large capital inflows. But capital flows cannot always be of the order that we have seen in the last few days. If capital flows stop, or even worse, if they reverse to some extent, then you could start to see the rupee depreciating. And if the rupee depreciates, then for a global investor who is looking at a dollar return, even if the market remains flat, his returns become negative. So these are some of the worries over the next few months.
How is the situation in some of the major markets? Is the US on the path to recovery? Or is there still a fear of double-dip recession?
Regarding the US, the consensus is that the worst is clearly over. Having said that, you are not going to have a dramatic recovery over the next quarter or couple of quarters. It is going to be a fairly long-drawn process. In fact, only yesterday I was reading an article in The Economist which said that the US would get back to a normal sort of growth rate by 2014. For the next few years growth will be tepid.