Interviews Markets
Rising probability of of global risk-off biggest threat to Markets: Business Standard Interview
June 4, 2018

You expected around 10-15% return from the markets in calendar year 2018 (CY18) when we spoke last in February. Is there any change to these estimates?

I have maintained that 2018 will be a year of Micro improvements and Macro risks. I feel that that is panning out, the numerous structural reforms undertaken over the past years(GST/RERA) is behind us and we are now seeing a largely broad based recovery.
While domestic fundamentals are strong, global concerns with regards liquidity and balance sheet tightening of the Fed & ECB are areas of concern. Further, the rising Oil prices, Trumps trade wars and more recently the Italy issue are all developments that have contributed to the volatility of the markets. That being said, I am still bullish on India’s prospect of being a story of the decade and the opportunity it offers to create significant wealth, despite all challenges & risks.

How insulated is India from these risks?

A rising probability of global risk-off is the biggest risk to the markets which could get triggered from any of the factors like Trade war, Fed tightening or European Situation. Markets gets jittery whenever these signs develop. USD getting stronger also has huge implications for the already leveraged EMs (India included) in terms of cost of capital as well as capital availability. On the domestic front, given that this year is a precursor to the election year, one could lots noise which keep markets jittery.

The weights of India and Brazil markets could be capped on MSCI Indexes. What are the implications for the Indian markets?

MSCI currently has an exposure to Indian market to the tune of $35-38Bn via the MSCI EM Index. Application of capping factor to India will surely dent the flows that track India via the Emerging Markets Index. On one side China A share inclusion in the EM basket will gradually take China’s wt in MSCI EM higher and on the other hand use of capping factor on India will further reduce the wt of India in the EM Basket. We believe if such capping factor is introduced then MSCI EM Index will be highly dominated by China Wt and will not reflect the true picture of Emerging Markets.

What are your key takeaways from the March 2018 quarter earnings season?

I think by and large, the results have been on the good side, indicating a demand recovery in the economy. The mid-teens growth of YoY PAT in Commodities and Domestic Investment sectors and with FMCG, Domestic Auto companies, retail lending banks, NBFCs posting good results it is safe to say there was a broad based recovery. It was heartening to see a green shoots in rural economy with FMCG and Two wheelers posting good numbers. Margins seem to be getting better in IT, whereas in the Consumer Durables space, demand is muted, and an increase in input prices is putting pressure on margins.

What are your sector preferences from one year’s perspective?

We are quite positive on IT, BFSI, Infra and Consumption. Also, quite positive on private capex. I think this is one overlooked theme in the markets. Green shoots are finally visible after a long hiatus of over half a decade and hence this is one sector investors should watch out for. Most corporates across sectors have started equipping themselves for growth as their capacity utilization is rising. Power and Utilities is another sector that is broadly neglected by the market, but I feel this too could be a good contra bet.

Has the outcome of the recent elections in Karnataka made foreign and retail investors in India cautious on the possibility of a hung mandate in the general elections scheduled for 2019?

I think that it is still premature to comment on the General Election outcome, and one State’s outcome does not constitute a trend. Further, the market recovery post results has clearly indicated that the Market has treated this as a one off event. However, generally speaking there could be volatility in the year, as is usually seen in the run up to major elections. There will be lots of noise in next one year around politics which will keep market nervous.


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Vikas Khemani

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