From Trump’s Taxation Policy To Cash Woes, India Stocks In For A Volatile 2017
Overseas inflows to face near-term blip, says Maheswari of DSP Blackrock
India will continue to be among the preferred investment destinations next year, but the impact of a rate hike by the U.S. Federal Reserve on the domestic fund flows and the government’s ability to speed up the reform agenda to boost growth must be closely watched.
That’s the verdict coming-in from top bosses of some of the leading India-focused investment houses that BloombergQuint spoke with on our weekly market chat Thank God It’s Friday.
Fund Flows
Most fund managers and market analysts said India, which got Rs 21,200 crore worth of overseas flows in 2016, could witness a minor near-term blip in the aftermath of an interest rate hike by the Fed coupled with its guidance of three interest rate hikes in 2017.
As interest rates rise in the U.S., money tends to flow away because it is an indication of a pick-up in the economy.Anup Maheshwari, Executive Vice President & Head-Equities, DSP BlackRock Investment
While Maheshwari remains positive on the outlook for fund flows, he cautions that the trajectories of foreign and domestic fund flows may continue to be divergent.
As far as India is concerned, for all of us as local investors, it is a great trend for interest rates to be heading lower, considering it is positive for financial assets, particularly for equities. So I think this slight conflict between domestic and offshore flows is something that we are going to have to get used to for a little while.Anup Maheshwari, Executive Vice President & Head-Equities, DSP BlackRock Investment
Trump’s Taxation
Markets also seem to be a bit wary of the President-elect Donald Trump’s stance on corporate taxes, an area of interest not just for American corporates but also investors globally.
If Trump lives up even to half his promises of cutting corporate tax in the U.S. from 35 percent to 15 percent, allowing money to go back from outside at 10 percent...if he does that, I think a lot of money is going to go back to the U.S.Vibhav Kapoor, Chief Investment Officer, IL&FS
U.S. companies have a tax rate of about 39 percent, the highest among developed countries and Trump is aiming to bring it down in a bid to shore-up domestic investment and hiring.
“We can see emerging markets have sort of big drain of funds, both from bonds as well as equities, and that is only going to continue, maybe accelerate if all this happens over the next 12-15 months and that is going to have a detrimental impact on all emerging markets,” added Kapoor of IL&FS.
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Domestic Woes
Investors also seem to be in caution mode in the wake of the demonetisation and the lack of clarity on the timeline for implementation of the Goods and Services Tax. The outcome of the U.P. assembly elections could further complicate things for the government.
Clearly for India, the outlook will depend on the state elections in the first quarter, it will depend on GST and its implementation. India could actually surprise next year. We are not expecting Indian to race away any time soon because there is still the uncertainty about the effects of demonetisation. But I think at current valuations and a slightly longer term view, with what is going on the ground and if those election results come through positively then India could do well next year.Jonathan Schiessl, Chief Investment Officer, Ashburton Investments
Volatility In The Offing?
With so many specifics undefined, markets are expected to trade volatile at least in the near term until clarity emerges on both global and domestic fronts.
Clearly we’ll have a positive view but the near term is going to be very volatile... Having said that, our view has always been that for the next two years, the operating cycle will improve. You will see capacity utilisation going up, you will see earnings going up, and that would lead to market returns improving.S Naren, Executive Director & Chief Investment Officer, ICICI Prudential Asset Management
Despite near-term volatility, fund managers expect Indian equities to pick up momentum as the year progresses amid hopes of improvement in corporate earnings, bold economic reforms and supportive valuations of domestic equities.
“…we have had so many false starts in the last few years on earnings growth – we are really hopeful that FY18 is finally a year when we start getting it,” says Maheshwari of DSP Blackrock.
“This period is just a small air pocket in that journey. But lower interest rates, fairly decent valuations, if earnings come through, there is no reason for markets to not look a lot better next year,” he says.