Edited excerpts:
Q. With the Reserve Bank of India signaling a gradual rate hike cycle, what do you think about the impact of rates hike to equities?
A. An inflationary market environment pushes central banks to increase rates to reign in business spending which can lead to depressed business sentiment.
With less growth of credit, there is potential for lower earnings growth and this could eventually impact the stock market performance negatively. However, the relationship is rarely as direct as this and a number of other factors could influence market performance.
If we are in a growth cycle then business sentiment could remain unchanged and stock market performance could remain healthy. Again a lot depends on the length of the period of sustained rising rates and how long this trend will continue.
Q. Latest flow data shows that retail money into local equity funds is holding steady and domestic flows have provided a great cushion to Indian equities from foreign outflow. Do you think that trend will continue?
A. In India, a large bulk of the domestic money invested in stock markets tends to be of a short-term speculative nature and is more susceptible to market returns. In the past, we have seen a rush to withdraw funds when markets have seen a dip.
However, the situation is a little more complex this time. Property prices remain depressed and the interest rates offered on bank deposits still remain low. In this scenario, there are not many places for the domestic funds to go.
There is some expectation that some overflow could be mopped up by gold buying but that is not enough to make a mark on the large domestic funds. We would expect the demand for equities to remain healthy from domestic buyers but if depressed stock market performance is sustained over a long period of time then the trend could change.
Q. Given the current global market scenario and US Fed looking at raising rates, do you foresee foreign portfolio flows typically being diverted to developed markets?
A. With higher interest rates in the US, emerging market fund flows are adversely impacted. There is a rush to safe-haven US Treasuries investing and the ‘Fragile Five’ i.e. Brazil, India, Turkey, Indonesia and South Africa are considered especially susceptible to this and may end bearing the brunt of US rate hikes.
Net oil importer countries like India, Turkey and South Africa are facing the double whammy of higher crude oil prices which does not bode well for their economies. In addition, the adverse INR/USD exchange rate, which has seen 15 percent plus fall this year alone also triggered negative investor sentiment from global investors.
Q. What's your view on whether the global equities have absorbed the interest-rate hikes in the US?
A. We have to see this in the context of the longest equity market bull run in the US since the 2008 market crash. A sustained 10-year market growth has to reverse at some point and this may yet be the tipping point.
With an uncertain global economic outlook, political uncertainties, the markets could be subject to some higher volatility for some time before they find their trajectory.
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