Will India remain the best bet for FIIs?

Feb 25, 2015

In this issue:
» Private sector capex on the decline
» Are banks going back to their pre 2008 ways?
» A fourth of the post election QIPs are trading below issue prices
» ...and more!

By definition, Union Budgets are supposed to be Annual Financial Statement of the government as per Article 112 of the Constitution of India. In other words, it is the annual budget of the Republic of India. However, over the years, the media attention over the annual economic event is hardly short of that over a Bollywood blockbuster. Maybe more! And this time the frenzy is many times over, thanks to the sky high expectations from Team Modi. With the 1992 Liberalization Budget in hindsight, not just investors in India, but investors, policy makers and regulators world over are looking forward to 28th February 2015.

Whether this single event will change the world's view about India is anybody's guess. But what really matters is whether the view of Foreign Institutional Investors (FIIs) about the upside in Indian stocks remains the same. FIIs have pumped in billions into Indian stocks over the past 8 months, ever since the Modi government got elected. And if nothing else, the Budget this time around will be an important yardstick for them to measure whether this government is serious about reforms.

Now it is not that the foreign investors are not cued into the earnings performance of India Inc. And the same have been disappointing to say the least. The earnings visibility too remains hazy with most corporate capex anchored to critical reform measures. Despite this the FIIs have been buying stocks in India at premium valuations. The only logical rationale for this being that 'India is their best bet', on a relative basis. An interview with Jim Walker, Founder and chief economist of Asianomics, published by Mint, clearly points to this thought process of FIIs. The positives in favour of India clearly outweigh the negatives as long as the government acts on its promises. However, if continues to show no signs of doing so, the deep pocket FIIs will instantly start looking for 'better bets'. And that will mean billions of dollars moving out of stock markets in India to other more lucrative emerging markets.

What could also shake FIIs' confidence in the economy is its sovereign rating. Rating agencies like Moody's have refused to upgrade India's rating based on the new GDP growth data. And the writing is clear on the wall that fiscal measures will determine India's rating going forward.

So, whether we like it or not, FII sentiments on Indian stocks will have a big role to play in the direction of Indian markets over the next few months . And investors would be better off bracing themselves and their portfolios for significant volatility. Having said that, we believe that there are companies that will ride the long term economic Megatrends, come what may. And if the market offers attractive valuations, there is no reason why you should not add them to your portfolio.

Do you think India will remain the best bet for FIIs post Budget? Let us know your comments or share your views in the Equitymaster Club.

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At a time, when we are hoping for a major revival in corporate capex, things on the ground seem to be hardly enthusing. Readers would recall that just a couple of months back, large private sector entities had laid out ambitious plans to increase their gross block. However, as per a survey by rating agency CRISIL, the capex plans of private sector companies (except financial sector entities) for financial year 2015-16 actually indicates a decline of 4%! The rationale is that the debt-ridden private sector will continue to be reluctant to kick start investments.

Hence, the only alternative is for the government to create a war chest to increase its spending to boost the slow-riding investment cycle. Moreover, almost 80% of the capex is expected to come from sectors like oil & gas, power, roads and metals in FY16. And it goes without saying that the capex plans in these sectors will be dependent on the government's reform moves.

In the month of October last year, deputy RBI governor had stated that the amount of unhedged foreign currency debt rose to as much as 85% in two months leading up to August as compared to a figure of 65% for FY14. The rise in this figure increased the risks of financial instability; to curb the same, the RBI had stated that banks would need to make higher provisions for accounts that have unhedged forex exposures. In fact, it was only a few weeks ago when the RBI has stated that Indian corporate need to increase their hedging as many things could go wrong as and when the US starts increasing interest rates, something that is expected this year. All of this is aimed towards better preparing for a possible turmoil.

As reported by Business World, the RBI's dollar buying had pushed up the cost of hedging for companies to 10-12%.

The Mint has reported that Indian banks, however, have been arm twisting small and medium companies to hedge their positions at higher costs; threatening to cut off future credit in case they do not. While this action may be on account of banks looking to safeguard themselves from the higher provisioning norm set by the RBI, we believe forcing entities into getting into derivatives is a malpractice. The decision to do so essentially should lie with the borrower. This reminds us of 2007 - 2008 when banks made the most of the market situation then and pressured companies to enter into derivative positions, which eventually led them to take wrong positions and in some cases wiped out their profits entirely.

  Chart of the day
A bunch of companies made the most the buoyant market sentiments post the elections to tap the equity markets through a quicker QIP route, for raising additional funds. As reported by the Business Standard, as many as 35 companies took this route since the elections results were announced. However, it turns out that about a fourth of these issues are trading below their issue prices.

The worst performing post election QIP issues

Issues of companies such as that of Jaiprakash Associates, Reliance Communications and GMR Infra have performed the worst with losses in the region of 40-65%. The Sensex since the election results is up by about 20%.

As per us, this is just another example of market exuberance, driven by sentiments rather than fundamentals. Expectations at the time were that the government would make a slew of changes (very fast) that would shoot up the economy. However, as we have been seeing in recent times that has certainly not been the case. A good way to avoid one from experiencing such shocks is staying away from trends and focusing on aspects such as fundamentals, long term track records and last but not the least, valuations. One should remember that saying no is as good a decision as saying yes when it comes to investing.

The Indian stock markets shed their first half gains as profit booking intensified at about 2 pm. The benchmark BSE Sensex was trading flat at the time of writing. Weakness was seen in stocks across the board with metal and healthcare stocks trading the weakest. Most of the Asian equity markets ended the day on a firm note; stocks in Europe were trading mixed at the time of writing.

 Today's investing mantra
The world of derivatives is full of holes that very few people are really aware of. It's like hydrogen and oxygen sitting on the corner waiting for a little flame" - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee and Devanshu Sampat.

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