Low Interest Rates Can Address the NPA Issue
Raj Bhatt, CEO of Elara Capital, the Londonbased investment bank and brokerage, believes the financial environment is risk averse with large investors chasing ‘return of capital’ rather than ‘return on capital.’ The risk-taking ability of large funds is low on fears of financial meltdown, making capital protection a priority over seeking return on investments. Yet, Bhatt says commodity and equity markets may not see a February like crash. In an interview to Palak Shah, he talks about the catalysts and hurdles for foreign money flow into India. Edited excerpts:
Did the stock markets see their worst in February or another sharp fall is expected? Markets may be range bound for some time. Although, global liquidity is high due to negative or low interest rates, risk aversion too is extraordinary high. In Europe you have bonds trading at 8-10% interest and we call them junk. For instance, Vedanta has gone for its third buyback of bonds and signalled to markets that they have cash but investors are cautious in buying company’s equity. Large investors are chasing ‘return of capital’ rather than ‘return on capital.’ Yet a sharper cut in global equity markets may not happen as benchmarks are not trading much higher than the bottom they formed in February. When will foreign money flow into India improve? Emerging markets (EMs) are considered risky bets currently. Although anticipation of higher return from India has kept fund allocation substantial, a low free float of equity stock in India’s market limits the opportunity for FIIs here. Funds do not want to drive up valuations. If you bring $10 billion into Indian equities, indices move up by 10% or more. Hence, FIIs are open to invest in divestment issues, IPOs or do block deals where risk of driving prices higher does not exist. Also, Indian markets are fairly valued and may not see re-rating till the time earnings catch up. This would take a few quarters. Till then, higher fund flows can be expected through private equity deals in unlisted companies or project finance, debt and FDI. Giants like Apple, Caterpillar or Intel could increase their allocation to India for setting up units. China benefited from these companies but India is (now being) preferred due to (Prime Minister Narendra) Modi’s pitch.
What are the other factors FIIs are looking at in India? India’s bank NPAs (non-performing assets) are a major problem. But keeping interest rates high is a bigger problem than NPAs. Low rates can address India’s NPA issue. It could make projects stalled due to higher cost of capital viable. Companies like GMR, GVK or JP Group will find some ground to stand. Inflation is not as a big issue that it is made out to be. Technology disruption has caused all the trouble, not rising prices. Interest rates in India are highest globally. Smaller countries although battling inflation slashed interest rates drastically to avoid defaults. Even Pakistan played it smart on this by sharp cut in rates in just few months.
What’s your outlook for crude oil and other commodities? Is Brexit a threat? Crude is near its bottom. Oil produc- ing countries cannot indefinitely run deficit. There is tremendous pressure on them to cut or freeze production. Historic data suggests that such low crude prices are unsustainable for long. Currently, 96.5 million barrel per day is the global demand and production is 95 million barrels. If each country cuts production by 5%, oil will rally. Even though nobody is cutting production now it will happen. Oil could be at $60-70 in few quarters. It would bring down redemption pressure on sovereign wealth funds. Similarly, metal prices too have bottomed.