Global events will keep driving Indian market sentiment over next 90 days: Vikash Kumar Jain

I do not know how to really perceive what is going on in the world. So, let us talk about India, what we understand and the good thing or the silver lining so far has been that at least in the last one month we have seen FIIs change course. But does that look like it is permanent in nature or would you say that it is a very tactical positioning?
Vikash Kumar Jain: Although, we would like to talk more about India, but what is happening in the market is not just India is doing, it is basically a kind of a corollary of what is happening globally. So, globally if you think, you are uncertain about global trade, you would want exposure at places where you are less exposed to global trade, so that is where India comes in.

I would say that is also the reason why FIIs are looking at India as a bit of a hiding place for now and that is what has changed their behaviour as well. It is not so much of what has happened because domestically things have not really changed that materially.

Yes, there is more confidence on rate cuts, but beyond that there has not really been any material change in terms of domestic things and that is why even our report from today talks about the fact that is India’s Tina back, possibly for now at least, and that is after six months because September end is when our markets topped out; October is when people were talking more about China; November, December, January people were talking more about US and how things will be good for globally for markets other than that as well and it is only about March onwards as where suddenly people started getting a bit more worried about global trade.

If you think, it has been only less than four months of this year, but they have been anything less than in terms of exciting, if I were to call so, in terms of volatile. For example, January to February if you look the first two months of this four-month period, India was the third worst performing market in the world and March and April the two months over there India has been the best performing market in the world. So that is really a complete change in fortunes for India.

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All in all, the scorecard for the year is still 3% YTD which does not really tell you enough, but it has been pretty volatile times on this overall period and a lot of that has been because of what has been happening globally.

The fact that you did say that it looks like it is India’s Tina moment, that there is no other alternative, that could be one of the reasons why we are seeing this sort of an excitement at least in investors mind and that is the reason why the shift is happening to India. So, if I have to read between the lines, do you think that this is just temporary, it is not permanent, and we should actually be more cautious when you talk about our approach for Indian markets?
Vikash Kumar Jain: So, again, none of us can be certain about it and that is why people want to hide in a place like India given the way the whole global trade policy is changing by the day. But if you were to think about, for example, the president’s own talk of the art of deal, etc, if you go by that playbook, then obviously he will escalate to the highest level and then kind of really make it at a level which is somewhere in the middle in terms of finding ways to get to a deal.

I would say as confidence rises, that the US will sign deals with more and more of their partners and perhaps yesterday there was talk that they have started talking to China as well, this uncertainty on global trade will reduce.

As this uncertainty on global trade reduce, that desperation to hide also goes away and that could maybe take away this
temporary Tina which people are feeling about India. But again, a lot of this has a lots of ifs and buts and characters who are difficult to predict in what they would like to do and that is why it is still at least for the next 90 days or whatever is remaining of that 90-day period, it will be a headline driven market.

Since FIIs are finding Indian markets to be the hiding place, help us understand in which sectors they are finally settling in. Because we are just reading your report which says that in the month of March what kind of positioning they have done, but of late since they have been buyers, so what changes sectorally are you observing?
Vikash Kumar Jain: So, a few things that we have observed, firstly, after a very long time, after almost about seven to eight quarters value was by far the best performing style in the first quarter of this calendar year, that is, the Jan to March period. And in addition to that, there is now a tendency to look more towards domestic oriented play.

I would say the places which will be under favour and are under favour is domestic plays, more on consumption, more linkage to interest rate sensitives, and also maybe some gainers of a weak global outlook because commodity prices, etc, also get impacted and some consumer kind of companies who use commodity as an input could get some gains around it.

So, basically, domestic consumption and rate sensitives would broadly be the areas which they will favour. Areas which are exposed much more to global growth is where people will be more tentative.

What about debt linked investment opportunities? While, of course, in the month of March there has been an outflow, but do you think now with the interest rate trajectory easing, money would perhaps move back a little bit to fixed income?
Vikash Kumar Jain: If you are talking more about India, one of the reasons why we believe that a significant rally from here may not be so easy is if you were to look at right now and this thing has changed dramatically in the last few weeks, India is the most expensive market in the world.

It is the only market which is trading at over 20% premium to its long-term average valuations, that is, 20-year average valuations. Even on a simple percentile basis, only 10% of the market been more expensive than where it is today.

But the other point that we take a lot of pains to explain in our report from today is that even what has happened and what has also fuelled this rally is a big correction in Indian yields at a time when US yields have been going up and even other yields have not been falling that much.

So, I would say that we have reached a point and this we do by comparing Indian yields to other global benchmarks, to currency depreciation expectations and how they have moved, also looking at historical correlations to real rate as well as RBI‘s own repo rate, we come out with a point that perhaps a large part of decline in Indian bond yields is behind us and incrementally that will no more be that big a tailwind.

So, both Indian bonds and Indian equity appears quite extended on valuations. Yes, uncertainty on India is much lesser than many other markets and that is fuelling this favourable reaction. So, let us see how long that lasts. But in terms of valuations, further room is very limited for rerating.

What option an Indian investor have because we do not have so many global options to invest in?
Vikash Kumar Jain: Well, yes, but again we had a similar kind of a situation sometime around October, November, or so. Any big moves in the market only happen at times when foreigners become reasonable buyers and that could get deterred because foreigners have other markets as an option. Yes, domestic flows, what that allows, what that ensures for our market is provides some kind of a smoothening out in a corrective period, maybe prevents a big dramatic decline and a drop in the market by buying coming in.

But domestic flows in itself, the way they have reacted, if you look at the history of the last two years or so, the best have been months where foreigners have come in.

In fact, when domestic flows have been there, even large flows, but foreigners have not participated, we have not really seen big up moves in the market. So, I would say that from that perspective it is important that we do not forget that big moves are still linked to when foreign flows turn and that is what still matters for the markets to go up significantly.