What’s causing this relentless selloff by FIIs? Andrew Holland explains

What do you make of this relentless selling by FIIs? Is there extreme pressure on hedge funds seeing redemption? Is that the reason for this selloff in EMs that we are seeing?
It is a combination of the fact that interest rates are rising and everyone is taking risk off the table. It is across the board, not just for emerging markets. So for some of the developed markets, we would get the kind of indices showing it stronger. For example in the US, the tech companies have really held up the market back to the rebound after Amazon results. The UK and European markets have been held up because they have a large component of companies in the oil and energy sector and the oil prices being where they are today, helped emerging markets.

The combination of potentially higher rates, higher inflation and the being an importer of oil does not help EMs and what foreign investors have been selling is this risk that they see from emerging markets. And it has always happened. Interest rates were expected to rise. We will see that across all risk assets. It is just continuing at the moment.

Do not forget that when the Budget is over, India is a great growth story but it does not mean that the government is going to throw all of that money straight into the economy. It will take some time to play through. So it is not surprising that foreign investors are just taking money off the table. And do not forget that even last month when markets fell, it was one of the best performing markets in the world.

Every time we saw FIIs selloff in India, banks were the first one to fall. This time around it is different. Other sectors are falling and banks are showing some resilience.
Yes, the banks have delivered very good results across the board. But as we move to the economy reopening, obviously investors would look at the economy facing stocks like the banking sector in particular. It has been one which should benefit as the growth continues and hopefully private capex starts to pick up. So, lending would start to pick up for the banks as well but that is the only bright horizon for the market at the moment.

Other public sector banks like SBI, Bank of Baroda have beaten all parameters. There is this huge conversation happening regarding the outperformance of public sector banks versus the private sector banks. Where do you stand on this one?
Whilst the banking sector is going to be a reflection of how the economy recovers as we reopen, I am still a little sceptical on the overall banking sector. In the private banks, there is a change of leadership in terms of where the pecking order is and how to invest. Whilst the PSU banks have done well on any kind of problem going forward, they are always prone to mishap. I just do not feel that the banking sector as a whole is really going to hold up the market in the very short term.

There are too many global factors out there which will scare investors in the next few weeks and months ahead of what the Fed does. And we can talk about our domestic market but we are going to be led by what happens globally and it is a divided market out there. There are people who say there are going to be five to six rate hikes this year and there are people out there saying that after the first Fed rate hike you will find that the economy will start spinning down very quickly and therefore there would not be any more rate hikes.

But whichever way I look at it, the markets will probably have to kind of selloff to reflect that slower earnings growth or something to reflect higher interest rates or the fact that the economy is slowing. If I look at the kind of view that is going to happen, this is why you can expect volatility but in the short term it will depend on what happens in global markets. So while the banking sector might have done well in terms of their results, just see outflows continue for a few more months yet.

Now crude is on the boil, there are inflation fears in the US. As far as the Indian market is concerned, overall valuations are getting very expensive and tech stocks are coming under pressure because of the entire interest rates going up. In that scenario, what are you recommending to your clients? Where does one hide? Should one look at domestic cyclicals?
One can hide in cash and that is what investors should be just sitting around for the moment until there’s clarity from the Federal Reserve. It is a divided market. The Fed is behind the curve and it is going to be aggressive on rates. That could obviously have a big impact on the economy. But the only focus is on the interest rate hikes.

First of all, we are going to be tightening in terms of tapering or the amount of money that they have been sloshing around in markets. But the balance sheet is the big thing and we still do not know what the Federal Reserve’s view on that is and how much they want to bring that down. I have seen figures as high as 2 trillion. If one takes interest rates on $2 trillion reduction in your balance sheet, that is quite a lot for the market to digest.

I think the market is trying to ignore it and that is why we are going to see this volatility because if that was the case, then markets would be quite a lot lower than where we have been today.

On one hand, there are IT and other global facing sectors like metals. On the flip side are consumption and aviation sector. Would the latter interest you at this point of time? Good numbers have come from IndiGo and apart from that, even consumption stocks are doing better in terms of revenue growth though there are some margin pressures. What is your take?
I think the economy facing sectors is the only place that really look good in the next six months because as the economy re-opens, then obviously we are seeing some of the numbers come up in the hotel companies. In the case of ITC, we saw how well their hotel business has done. So the hotel and travel industry will continue to pick up. Even if it is just domestic travel, that is enough for these stocks to see the operating leverage really kick in.

I am slightly wary of the airlines but I think with prices of fuel where they are today, it might hamper their recovery but certainly the hotel industry and the leisure industry are going to see a really strong pick up tailwind for many years.

I think six months is probably the timeline when I would see overseas travel for holidays rather than internally. As we open up our borders, then we will get foreign travel also. The overall hospitality industry should be looking good for the next 6 to 12 months from the earnings view point.

What have you made about who pays the interest and how much do they tend to pay with every rate hike? It will take some time for markets to digest how things will move on that front and is that the reason for this volatility?
It is a divided market. In terms of how many rate hikes are seen, it started off with three only a couple of months back and now it is five to seven! Until there is further clarity and the Fed lays out the roadmap particularly for the balance sheet, this volatility will persist. My fear is that they are acting too late and they are acting at a time when the economies globally are starting to slow.

The Baltic Dry Index is telling us a story. It has really collapsed. It is telling us that the movement of goods is not really happening and we are tightening into this. I am just feeling that there is a policy misstep ahead or has already taken place and this will spook the market because if it does have the impact of slowing the US economy in particular, then the global economy and then earnings will have to be reduced downwards and the market has not done that yet.

So even though we saw some kind of hit on the tech companies in the last few weeks, this has not been broad based. It could well be that we will get the tech companies and a broad-based reduction in earnings for other companies as well as the economies slow if everyone is raising rates at the same time.

Is that the reason why IT companies in India are down or were you talking about tech companies like Facebook and Netflix?
I am talking about yes I mean the whole tech sector. It is a divided market in terms of are we in that kind of dot com bubble type of stage? Are we going to start to see some of the slowdown in some of these revenues by the big companies? That will have an impact and our our own companies here will be affected.

One cannot walk up and down the escalator, it is very difficult. Once the sentiment is against that sector in terms of technology and anything around it, even though our IT companies are really not companies like Amazons and so forth, we cannot walk away from the fact it will have an impact. It helped them on the way up in terms of the whole growth in industries and obviously it will have an impact on the way down as well. So you cannot just ignore it.