Outflows Inspire ICICI’s Picks as Rupee Tumbles: Corporate India

ICICI Prudential Asset Management Co., India’s third-largest money manager, is picking exporter stocks as concerns the U.S. will phase out stimulus caused the rupee to plunge and foreign funds to dump equities and debt.

Global investors have pulled $1.5 billion from local shares in June, poised to become net sellers for the first month since May 2012, data compiled by Bloomberg show. They have also cut rupee debt holdings by $5.1 billion after buying in each of the previous six months, as rising U.S. treasury yields damp the attractiveness of emerging-markets assets.

“If you were to tell me that foreign investors have sold this month then we’d consider it a good month to invest,” S. Naren, who oversees $14.8 billion in assets as chief investment officer, said in an interview at his Mumbai office on June 24. “Foreign flows are not an indicator of long-term performance. We use flows in the reverse way.”

India’s rupee sank to a record today against the dollar, extending this month’s slide to 7 percent, the world’s worst performance. Kotak Institutional Equities raised its profit forecast for the 30 companies in the benchmark S&P BSE Sensex to “low double digits” from 9 percent as a weak currency may aid earnings of software exporters and drugmakers, Sanjeev Prasad, co-head and senior executive director, told Bloomberg TV India on June 24.

“We have always believed in exports as a theme,” Naren said. “We took this call over the past two years and could consider” adding to exporters of technology, pharmaceuticals, auto parts and textile, he said, without naming any companies.

Rupee Record

The rupee fell 1.8 percent to an unprecedented 60.73 per dollar, surpassing the previous record of 59.98 on June 20. The currency pared losses to close at 60.73.

The ICICI Prudential Discovery Fund has climbed 18 percent annually in the five years ended May 31, beating 88 percent of its peers. Drugmakers, software exporters and chemicals makers accounted for 17 percent of the fund’s assets on May 31, data compiled by Bloomberg show.

ICICI Prudential Asset held about 0.4 percent of Reliance Industries Ltd., owner of the world’s largest refining complex, across all its funds as of May 31, the data show. Reliance is the nation’s biggest exporter, accounting for 14 percent of the total shipments, billionaire Chairman Mukesh Ambani said at the shareholders’ meeting June 6. The stock has risen 11 percent in the past year, compared with the 9.7 percent gain in the Sensex.

‘Huge Deficit’

The imbalance in India’s current account, the broadest gauge of trade, is the biggest risk to an economy that grew a decade-low 5 percent in the year ended March, according to the central bank. The International Monetary Fund estimates the gap at 4.9 percent of GDP this year, compared with 3.3 percent in Indonesia and a surplus of 2.6 percent in China.

“The export theme has a long way to play because when you have a huge trade deficit there is a requirement for exports to go up significantly,” said Naren. “There will always be the risk of rupee depreciation until the current-account deficit settles in the 2 percent-2.5 percent range.”

Naren said he’s selling consumer goods stocks because of valuation. The S&P BSE Fast Moving Consumer Goods Index trades at 28.7 times projected 12-month earnings, down from 33 times reached on May 11. The Sensex trades at a multiple of 12.4, the cheapest since April.

“It’s very hard to justify the valuation given low-volume growth in the consumer staples space compared with low double digit volume growth that these companies reported seven-eight quarters ago,” Kotak’s Prasad said. “In most cases, volume growth on a year-on-year basis has come down to a mid-single digit. I don’t think that can support a 30 P/E multiple.”

Heightened Volatility

The recent outflows have reduced this year’s inflows into stocks to $13.6 billion, still the highest in Asia after Japan, according to data compiled by Bloomberg. Foreigners have been net sellers of Indian stocks in just two of the past 13 years, the data going back to 2000 show.

“I don’t believe we are going to see $10 billion to $15 billion coming out of Indian stocks,” Jeff Chowdhry, head of emerging-market equities at U.K.-based F&C Asset Management Plc., which oversees about $150 billion, said in an interview to Bloomberg TV India. “I don’t see a 20 percent correction in the Indian market from here. If I am proved wrong, we will be buying the market very, very aggressively.”

Still, the potential for reduced stimulus and a general election to be held by May 2014 may heighten swings in Indian equities, said Naren. The Sensex’s 100-day volatility surged 61 percent to 15.4 from 9.6 in February, the lowest reading in at least a decade, data compiled by Bloomberg show.

“There’s the withdrawal of quantitative easing and the domestic election, a combination that suggests we will have volatility,” he said. “Periodically, we may have more dovish statements from the U.S. and that can cause volatility on the upside. Volatility will continue for may be a year.”