(Bloomberg) -- The sell-down of India's rupee and bonds will probably be short-lived, though stretched valuations mean investors may find the nation's markets less attractive at the moment, according to OppenheimerFunds Inc.
The dollar rally will fade, providing relief to emerging markets including India, said Krishna Memani, New York-based chief investment officer at the money manager, which oversees about $240 billion. The more significant challenges for India though is the slowing economy and relatively high valuations which are issues that could persist, he said.
Oppenheimer's views underscore the rising concerns about India, which saw its markets tumble last week on concern the government will widen its fiscal deficit with stimulus spending. The economy is slowing just as the dollar gets a boost from U.S. President Donald Trump's plan to cut taxes and the Federal Reserve's intention to keep raising rates.
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“If the Trump tax plan and Fed tightening lead to a strengthening of the dollar, Indian markets will be collateral damage in much the way they have been the collateral beneficiary over the last year,” said Memani. “Having said that, I believe the strength of the dollar will fade as the size of the tax cut and its impact on the economy is modest, and the Fed will reassess its hawkish posture in the not-too-distant future.”
The rupee strengthened 0.1 percent Friday to 65.4450 after declining to a six-month low against the dollar on Thursday. Overseas investors, who have been largely bullish on Indian bonds this year, sold 32.5 billion rupees ($497 million) of their holdings for the six days to Sept. 28. They pulled out $1.1 billion from stocks this month.
Oppenheimer, which is underweight India on valuation concerns, expects that rates will bottom out or fall rather than head higher, said Memani.
Other key views:
- On selloff in emerging markets:
- “The primary driver of these selloffs is the current strengthening trend in the dollar. Effectively, this is a reversal of the flows out of U.S. into EM assets over the last 18 months. If this trend continues, the likelihood that EM assets do well with a strong dollar, in my view, is quite unlikely. Having said that, I firmly believe dollar strength is temporary and will reverse itself”
- On selloff in Indian assets:
- “India has three issues -- a slowing economy, relatively high valuations and reversal of FII flows. The last one is temporary in my view. The first two are significant and are likely to persist. Therefore, I believe Indian bonds are a better opportunity than Indian equities”
- On India's position in emerging-market universe:
- “India still has the highest potential growth rate of any EM and therefore should be a favorite of any EM investor from a strategic standpoint. However, still high valuations and near-term challenges with respect to slowing growth makes India less attractive from a tactical standpoint”
To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net.
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds
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