​FII flows into domestic equities to be around $15-20 bn in 2015: Hui, JP Morgan AM

In a chat with ET Now, Tai Hui, chief market strategist-Asia, JP Morgan Asset Management, shares his views on the rate cut and FII flows into the Indian market. Excerpts:


ET Now: With the Reserve Bank of India (RBI) now announcing a rate cut, can investment cycle pick up? Do you expect more rate cuts going ahead?

Tai Hui: Given where inflation is right now, there is certainly more room for rate cuts really, which have help the economy. But the RBI needs to be mindful about the potential impact from the likely rate hikes by the US Federal Reserve and global liquidity flow. Overall, while I do think there is room for more rate cuts, we have to take into consideration the external environment such as the US Fed polices and global capital flows.

ET Now: FII flows into the domestic market crossed the $42 billion mark in 2014. Yesterday, we saw huge buying as well. The benchmark indices hit fresh highs too. Do you believe the 2014 performance in terms of returns and flows can be repeated this year?

Tai Hui: 2014 was exceptional in the sense that FII bond flows actually exceeded equity flows.

Even as the $40 billion-mark may be bit difficult to achieve in 2015, I am still confident that FII flows could be in the range of $15-$20 billion for the equity market. This would be possible on account of economic reforms by Prime Minister Narendra Modi, the upturn in the economic cycle and the rate cuts.

ET Now: Is plunge in copper prices a bad omen for the world economy? If not, is it just a side show amid tumbling crude oil prices?

Tai Hui: The drop in copper price is really reflecting expectations that the Chinese economy may grow moderately. China is expected to grow at around 7 per cent in 2015. Even if it happens, the demand for copper and other heavy industrial metals may still be positive. Nonetheless, the demand would be slower as investment in China sees even more moderate growth. One should not forget two things. First, the dollar is strengthening and is typically negative for commodities. Second, inventories for copper remains very high in China and globally.

These are factors largely contributing to weak copper prices. I do not think it is necessarily an omen of global economic slump, but China certainly played a huge role in driving copper prices lower.

ET Now: Even as crude is at a 5-year low, the World Bank has tempered its global growth expectations down to just 3 per cent for 2015. How do you see subdued growth impacting the equity market returns and foreign flows?

Tai Hui: Subdued growth does not necessarily be a negative for the equity markets. The global growth in the past few years has not been spectacular, but there have been some pockets where returns in equities were huge. Equities markets across the US and Europe in 2013 are cases under consideration.

Last year India, Indonesia and China made very handsome returns despite a relatively modest growth environment. So, I will be very careful in equating economic growth with equity market returns.


Having said this, low interest rate and low inflation environment are very helpful to protect companies’ profit margins. Therefore, I am still optimistic on equities. In fact, I will argue that this sort of more benign moderate growth environment is pretty good for companies to protect their profitability.

ET Now: Data released in the US, especially figures from the labour market, are getting stronger. When the US Fed may begin hiking interest rates? Has a bump up in the rates already been priced in?

Tai Hui: If you look at the recent Fed statement, any major change before April is unlikely. I suspect that they may want to start raise interest rates in the middle of the year. Overall, the path of interest rate increase is still likely to be gradual simply because inflationary pressure in the US continues to be very modest. So, Fed's first target could be around 1 per cent by the end of this year and maybe 2-2.5 per cent by the end of 2016. We are really moving from an emergency low to still a very accomodative level when it comes to policy in the US.