FII flows to be positive for India ahead: DSP ML 2008-02-06

Andrew Holland of DSP Merrill Lynch said the markets are still too dependent on global funds. He feels global markets will have a difficult time. The US markets are headed for a downturn, he added.
He does not expect a correction as bad as January. Value is starting to creep in some areas, he said.According to Holland, the focus is shifting on to the next Fed meet. He feels emerging markets are likely to perform going forward.It is a difficult time for Ipos globally, he said. "However, market sentiment is the main trigger."He expects FII flows to be positive over the next few months. "About 400 global investors are coming to India for conferences over the next few months."

Excerpts from CNBC-TV18's exclusive interview with Andrew Holland:

Q: What is your assessment of the global situation right now, with particular reference to emerging markets?

A: I felt the first quarter was going to be difficult and that global markets this year would have a difficult time. What we are seeing now is just a realisation that the US is heading for a downturn. Whether you want to call that a recession, is the moot point. I liken this back to the 1990-91 downturn. Any bad news just hits the market across the board and then you start moving away from that. It then becomes more sector specific, or stock specific. We are getting there and are not quite there yet. So, we are still seeing markets reacting to any kind of economic or bad numbers, be it the payroll or ISM manufacturing data. So, that's where the markets are at the moment.

Where will India decouple? It will do from an economic standpoint. For a financial kind of a decoupling, you can't quite do that yet, because markets are reacting globally and you have global funds. But as the dust settles over the next few weeks or so, we will start to see the emerging markets' growth starting to stand out again.So, we are not looking at fundamentals at the moment. I don't think global investors are. It is more about protecting and keeping risk down in more volatile markets.

Q: What would you expect to see over the next few weeks in emerging markets like India, a re-test of the bottoms of January or it will not get as bad as that?

A: I don't think it is going to get as bad as that. Most Asian markets will be closed for the rest of this week. As we move through February, everyone will start focusing on the next Fed rate cut, for which the odds are now more like 75 bps. Most commentators say the Fed is behind the curve, they are trying to get ahead of the curve now. We will start to see that from a lot of central banks, particularly Europe, over the next month.

So, are we there in terms of knowing exactly where the recession or downturn in the US is going to be? No. But are investors realizing that there are going to be a few more problems? Yes. Emerging markets will start to perform. What we are seeing is very low volumes in emerging markets. This means that investors are just sitting on the sidelines. There are some buyers coming back now and I think value is starting to creep into some of the longer-term funds. We are also starting to see FIIs become buyers.

Q: It has been a bit of a slump last week in the IPO market. What are your observations about the kind of valuations and what lies ahead for the IPO scene in India?

A: I have not looked at all the IPOs. So, I don't know all the valuations. It is obvious that when the markets are rising, companies would look to try and price it as high as they can. Markets have slumped and it is not just an Indian issue. It is also a global issue. So, IPOs globally will find it difficult.

I do not think we can argue about the valuations. But three weeks ago, those valuations were okay. So, I do not think we can just blame it on valuations. It is more to do with markets.

Q: What is your expectation on what FIIs will do over the next few weeks?

A: It obviously depends a bit on the global cues. But there are three stages of what we are seeing. The first stage is where we are now. Any bit of bad news spooks the markets. But any good news will also see the markets trading up very quickly globally.The next stage that we are going to is more to do with sector and stock specific action for the global markets. In that time, we will be able to judge where emerging markets are heading. Obviously, if the growth is still intact, India continues to stand out. So, flows by FIIs will be more positive over the next few months.

There is quite a number of conferences coming and I am sure we are going to see around 400 investors come to India over the next week. So, they should walk away positively, from what they hear, from the largecap companies in particular. I am sure that will reassure investors. So, that is where we are and you will see record numbers of FII investors here just to check the temperature and make sure things are okay. I think they will walk away with that reassurance.

Q: Do you see any change in sector preferences from large institutional investors this year, because you have seen IT, auto, and FMCG come back while some of the performing sectors of last year like infrastructure and power have not been doing so well so far in 2008?

A: It is going to be a bit rotational at this stage. If you go through the thinking of global investor, and if they sat in the US, they could only see that the services sector is under pressure. Think about IT service companies in India and you can roll that forward and say that it could affect those the abilitiy of people working for those companies to buy property in India. Therefore, prices might have to come down. So, that is the kind of thinking that global investors will go through.

In metals, it is more to do with price of coal going up and the input costs being high. The question is can steel companies continue to increase prices? Will the end user really accept those higher prices? So, that is the debate that is going on at the moment. Investors feel it might be more difficult for metal companies or steel companies to keep prices higher, and therefore if that is the case, they will have higher input costs, which will reduce profits. So, that is the thinking that global investors go through at the moment, There are a lot of cost pressures in India at the moment. They are sticking with the favourites in terms of the overall growth of India. Infrastructure will play a part in that. But valuations may have run ahead of themselves previously