In an interview with Business Line , Dinesh Thakkar, Chairman & Managing Director, Angel Broking, explains effects of the US taper issue.
How long do you expect the Indian markets to remain prisoners to what the Fed does on this issue?
All emerging markets including India would be influenced by the US Fed action as portfolio flows are an important determinant of market direction in the near term. While headline indices do gyrate to the global tunes, markets over a period of time price in the volatility. Although such markets are volatile, the fund flows induce a churn in the market establishing better performing sectors and stocks as clear favourites. Such sectors attract disproportionate FII interest over the medium term.
Do you fear FIIs would exit in any significant way from Indian markets once tapering becomes a reality?
We have seen multiple instances of FII exits from emerging markets including India. It can happen one more time. Investors or Government have no control over the quantum or direction of flows. Investors should only analyse the investment environment in the economy and the opportunities for growth. As long as they are intact, all kinds of investors — FII and domestic — will eventually come back.
Which are the stocks/sectors that you think would be safe bets if FIIs resort to large scale selling.
A typical situation resulting in FII selling would be based on the assumption of sticky macro problems of India, dollar strength and depreciating currency. These conditions are tailor made for exporters to make hay.
The more the FIIs sell, more the INR depreciates and better it is for exporters. FII-owned stocks in interest rate sensitive sectors would be more vulnerable not only from a supply point of view but also because of the changed assumptions about the economy.
Domestic institutions are major sellers in the market. Do you think this would only gather further momentum?
Unlikely. Domestic institutional investors have been sellers on the margin to manage redemptions. In the last 3 years, inflows have dried up in mutual funds and insurance schemes and the weak hands have been mostly out of the market explained by constant redemptions. There isn’t enough participation among retail investors to trigger panic selling right now.
The investment cycle is yet to pick up and political uncertainty ahead of Lok Sabha polls is keeping the markets guessing. Do you think till May next the markets would remain volatile?
A lot of uncertainty is known while it may not have been priced in at the current market levels. So volatility due to domestic factors is unlikely as the market would take note of the trends in the run up to the elections.
However, there might be more volatility in the run up to the Fed tapering. Once the Fed taper plan is known, the market will quickly reset its expectations accordingly. Investors must, therefore, avoid the temptation to wait till elections results are declared.