Rahul Chadha of Mirae Asset Global says his fund house continues to remain cautious on the market near term, largely as political uncertainty could aggravate the ongoing slowdown. He is recommending that investors should put their money in defensive stocks in the short term.
Chadha is bullish on pharmaceutical and IT stocks. He recommends buying cement stocks at lower levels. Chadha says there could be further upsides in oil marketing companies if the government is able to hike diesel prices.
Below is the verbatim transcript of Rahul Chadha's interview on CNBC-TV18
Q: It has been a different start to the year than what one had expected earlier. Have you changed your stance on India? How are you calling it in the near-term?
A: In the near-term, we would be cautious on the market. Our portfolios have been exporter biased, largely in IT companies, pharma companies. We will continue to be positioned that way. There is a perceptible slowdown in the economy that is largely a function of government curtailing its expenditure and the private sector not investing. This will continue for a while because of the election uncertainty, a new variable that has come up in the last couple of weeks.
Q: How would you approach the market at this point? Do you expect to see more by way of losses or do you think people should start making purchases at this level?
A: In the near-term positions should still be defensive. Pharmaceuticals, IT still looks attractive. Outside that, one can look to buy into consumer names and some good private sector banks on dips. One can also add cement stocks on dips. Two-three factors that the market would be watching for would be the current account deficit (CAD) number, which comes in next couple of days. Outside those developments, the political front would also be watched for and continuation of government's steps towards reducing fiscal deficit, doing the much necessary clearances to fast track investment in the economy would be watched by foreign investors.
Q: Is there a risk of further downside because of the political risks that are resurfacing? Talks of Samajwadi Party (SP) and the third front, the Dravida Munnetra Kazhagam (DMK) pulling out, are there fears of early elections or has all of that been priced in?
A: There may be a downside on certain sectors like financials which are well-owned. Should we see elections over next 3-4 months, we can see these sectors correct a bit from present levels.
Q: Now that the Cyprus bailout has been struck, do you think that headwind is finally behind us or because of the news flow that we have seen overnight, will Europe continue to restrict upsides in global equities?
A: This specific headwind is behind, but we have to be mindful of the fact that we have a lot of fragile recoveries happening globally. Each of the big global economies is going through its own set of views. Deleveraging is happening in Europe, US. Japan is going with its own slow growth and again China is trying to re-balance the economy. So every now and then we get these issues in one form or the other. From a portfolio perspective, it should be biased towards good large cap companies with healthy cash flows and stable businesses.
Q: The core problem remains, how poor earnings performance has been. We are going to get into earnings season again in April, what are your expectations?
A: One has reasonably high expectations from the IT sector and that should be on track. Most of these companies have guided to a good demand momentum. Outside that, private sector banks would continue to do well. Select pharma names would do well. The disappointments can come from public sector banks, auto companies and the global cyclicals. So, a lot of this is priced in the market. What moves market up and down from here will be more on the macro economic front for the country.
Q: The problem is also with the banks. On current reckoning it is down almost 3 percent for the Bank Nifty which is an influential sector. How are you calling it? Do you think over the course of next few months private sector banks may lose some of their sheen?
A: The private sector banks have very robust systems, so, I am not worried about the specific instances of exposes. More than that, it is going to be the macroeconomic view on the economy which would determine these banks. Most of the foreigners would own private sector banks. So, per se private sector banks are overweight across foreign portfolios.
If the view on the country turns more negative because of a political uncertainty or increased vulnerability on the trade or the currency front, then these banks may correct 5-10 percent from here, but for a longer term investor that should be a buying opportunity.
Q: What about the offers made by the government recently? Do you think government is making wrong choices with respect to what it is putting out into the market? Are there any recommendations from your end?
A: I would agree that not all choices are good that are done by the government. You need not necessarily divest stocks below the book value. They are not yielding much in terms of the value they get in the overall divestment kitty.
Some of the good names in the past like National Mineral Development Corporation (NMDC), Coal India have fetched government reasonable sums. Government can also look at some of the Specified Undertaking of UTI (SUUTI) stake that has blue chip stocks, liked by investors and there should be enough takers for that stake.
Q: Oil and gas has become a favourite in the last couple of days due to the diesel price hike that is back on track, so at least the reform process is on. Would you pump money into this sector?
A: There is a lot of value in the state-owned oil marketing companies (OMCs). Global commodity prices would remain fairly benign, range bound. If the government keeps on increasing the petrol and diesel prices which has been done in the last couple of quarters, it should be positive for these stocks. This is because these stocks are clearly under-owned and undervalued and we can see further upsides in these names.
Q: How are you feeling about the way this year is shaping up? It is an extremely volatile situation, but is it much different from 2012? Do you think we still have the capability to close up with positive gains by the end of the year?
A: It is tough to call a trajectory for the market. We have huge amount of uncertainty because of a lot of events which are on the card. In the near-term, market remains range bound or under pressure because of the slowdown in the economy. But should this slowdown reflect into a manageable CAD, we should see central banks more aggressive with rate cuts. On the other hand if the government continues reducing the fiscal deficit, kick-starting the investment growth in the economy through fast-tracking projects, we will get a floor to the markets.
In 3-6 months there is an election uncertainty for the markets. As markets get clarity on the poll outcomes that a strong government would be formed post the poll then we can see up-trading and huge upgrades for the market. However, till the elections happen and clarity come on the results, we will remain fairly range bound.
Q: Another problem has been the autos, how are you approaching that sector now?
A: Within autos we are more positive on passenger car segment over two-wheelers. At declines we have been adding to our exposure the leading passenger car manufacturer in the country. The name benefits from JPY depreciation and we believe that Yen is here to stay at around these levels. As the demand picks up, we should see strong earnings leverage. Outside that, we also continue to like luxury cars play globally.
We also have another large manufacturer that has a good model line-up. At declines, we would be looking at that. If you look at two-wheeler industry, the competitive intensity is going to be fairly high for that industry for next one or two years. We would like to stay away from that industry at that point of time. Outside that, select auto ancillaries look attractive and we have been adding it to our exposure.