Why FIIs have divested in Indian equity and the sectors they are bullish on
Nick Paulson-Ellis, Country Head, India, Espirito Santo Securities, talks about why FIIs have divested in Indian equity and the sectors they are bullish on.
Nick Paulson-Ellis, Country Head, India, Espirito Santo Securities
Nick Paulson-Ellis, Country Head, India, Espirito Santo Securities, talks about why FIIs have divested in Indian equity and the sectors they are bullish on.
Q. After record inflows of Rs 40,000 crore from January to March, FIIs have become net sellers of Indian equity from April. What changed?
A. A number of things. First, Q1 of 2012 was mostly a risk on LTRO (Long-Term Re-finance Operations in Europe) driven rally, with all emerging markets receiving inflows. There was also optimism ahead of the UP elections and possibility of it strengthening the coalition in India and a lot of the inflows were into financials (40 per cent) ahead of the expected turn in the rate cycle. Since March, risk appetite has reduced as Europe looked very risky, while the UP elections didn't pan out as expected. There has been no progress on reform, GDP growth has disappointed, GAAR (General Anti-avoidance Rules) has caused confusion and currency has been weak.
Q. What would FIIs like to see from Indian markets in terms of corporate earnings as well as policy decisions?
A. On corporate earnings, FIIs want evidence that downgrades have bottomed out, that revenue growth isn't rolling over and that consumption-led growth is not at risk. In terms of policy, investors are realistic. They understand that the UPA coalition is facing a difficult period. But, they want commitment to fiscal consolidation and attention to the investment cycle, specifically through power and infrastructure sector initiatives.
Q. Which sectors are FIIs bullish on and which are shunned?
A. FMCG remains the big draw for its defensiveness and strong underlying performance. HUL has seen several quarters of upgrades and FIIs are optimistic of this continuing. ITC also remains a favourite for its perceived defensiveness, though this is overstated. IT and Pharma, which benefit from currency movements and are defensive, are also in favour.
TCS and HCL have been the preferred IT plays, though TCS is now priced to perfection. Infosys is a good bet as we see increasing realism about the need to change course and be flexible on pricing.
Power and infra sector, much of metals and mining and any stock with governance issues are being shunned.
Q. After record inflows of Rs 40,000 crore from January to March, FIIs have become net sellers of Indian equity from April. What changed?
A. A number of things. First, Q1 of 2012 was mostly a risk on LTRO (Long-Term Re-finance Operations in Europe) driven rally, with all emerging markets receiving inflows. There was also optimism ahead of the UP elections and possibility of it strengthening the coalition in India and a lot of the inflows were into financials (40 per cent) ahead of the expected turn in the rate cycle. Since March, risk appetite has reduced as Europe looked very risky, while the UP elections didn't pan out as expected. There has been no progress on reform, GDP growth has disappointed, GAAR (General Anti-avoidance Rules) has caused confusion and currency has been weak.
Q. What would FIIs like to see from Indian markets in terms of corporate earnings as well as policy decisions?
A. On corporate earnings, FIIs want evidence that downgrades have bottomed out, that revenue growth isn't rolling over and that consumption-led growth is not at risk. In terms of policy, investors are realistic. They understand that the UPA coalition is facing a difficult period. But, they want commitment to fiscal consolidation and attention to the investment cycle, specifically through power and infrastructure sector initiatives.
Q. Which sectors are FIIs bullish on and which are shunned?
A. FMCG remains the big draw for its defensiveness and strong underlying performance. HUL has seen several quarters of upgrades and FIIs are optimistic of this continuing. ITC also remains a favourite for its perceived defensiveness, though this is overstated. IT and Pharma, which benefit from currency movements and are defensive, are also in favour.
TCS and HCL have been the preferred IT plays, though TCS is now priced to perfection. Infosys is a good bet as we see increasing realism about the need to change course and be flexible on pricing.
Power and infra sector, much of metals and mining and any stock with governance issues are being shunned.
