Rahul Chadha of Mirae Asset Global Investments sees falling inflation and rate cuts as triggers for the economy. He remains overweight on pharma stocks and wary of refining and petchem stocks.
The rally in the stock market faced selling pressure in the past two sessions and traders and market experts debate if it is a temporary blip. According to Rahul Chadha of Mirae Asset Global Investments, the market will take a temporary breather amid worries of trade deficit.
"Trade deficit was higher than expected and expectations for the month of May are also not quite positive. So I think somewhere currency or the trade data weighs on the market sentiment," Chadha told CNBC-TV18 in an exclusive interview. He said the Reserve Banks decision to ease rates may take a hit due to trade deficit although a 50-75 bps rate is on the cards until March 2014.
He, however, dismisses inflation as a concern but questions asset quality of PSU banks. Chadha sees falling inflation and rate cuts as triggers for the economy. He remains overweight on pharma stocks and wary of refining and petchem stocks.
Below is the edited transcript of Rahul Chadha's interview with CNBC-TV18.
Q: Do you expect a breather after the recent run up or do you think it is just a temporary one?
A: Temporarily we will take a breather. If we just kind of trace back, the rally started mid-April, on the back of current account data, the trade data which we got and inflation. Inflation continues to surprise positively. That has also manifested into sales growth for corporate India, which is touching as low as 8 percent. So inflation is less of a concern.
But like the way we saw for the month of April the trade data was a bit worrisome. Trade deficit was higher than expected and expectations for the month of May are also not quite positive. So somewhere currency or the trade data weighs on the market sentiment and then the valuations are also not cheap. On the other hand, falling inflation, rate cuts to revive economy are positives.
Q: There is also a slew of offers-for-sale (OFS) that we are going to see from now into the end of June, do you expect that to make a significant dent on liquidity and hence impact the market as well?
A: Near term it can obviously suck that liquidity out of the market. But beyond that again in a month from now we will be looking at same fundamentals - inflation, trade data and whether these rate cuts are having an impact on the demand in the real economy because at the end of the day, the rate cuts have to lead to consumption revival in the economy. Should we fail to see that, then clearly the markets can correct from here.
Q: What is it that you guys are picking up about liquidity though and the interest in emerging markets (EMs) because there is a strain of nervousness ahead of the event later tonight but generally on liquidity, are people quite comfortable?
A: Global liquidity remains high. Clearly Fed has also said in the past that they are looking at employment, which is yet from satisfactory in US for them to curb on the liquidity, though one keeps hearing all these thoughts or statements on some kind of a withdrawal of liquidity. But I still think its early day and to top the effects of it, we have got Japan which is spending its own money.
So clearly liquidity remains abundant and India is not the only market which is doing well. You look at the Association of Southeast Asian Nations (ASEAN), some of the yield plays in Singapore or markets, which have got good earnings tractions like Thailand, Indonesia, Philippines have done well.
So clearly India has been a particular beneficiary of this rebalancing, which is happening in China, which has led to a benign outlook for commodities, which where inflation in India is falling, we have seen rate cuts happening. On a micro level in India, we have seen some of these companies like private sector banks, health care and some of the auto companies coming up with good numbers, which is where liquidity is finding its way to.
Q: What kind of funds are getting these inflows, are there still allocations from larger emerging funds which is coming into India or has it come to the point where some of the India dedicated funds too are now beginning to see some inflows?
A: Globally investors are reluctant to put their money in a single country fund - whether it is India or China because each of these countries has their own set of issues. Whereas at the same time they want to play the equity story because the yields on alternate assets remain poor.
So what we see is them putting money in a pan Asia fund. Within our Asian funds, we would be overweight India and ASEAN and would be underweight Korea and Taiwan because we believe from a medium-term perspective, we have got pockets, some consumer discretionary, some staple and pharmaceutical names or some financials, where despite near-term expensive valuation, there is a good 2 year story. We believe that over the next 2-3 years one can still outperform compared to other markets.
Q: What have you been doing in terms of your portfolio positioning in this current rally, are you still riding the defensives or is it some of the cyclicals or higher beta names that you have started adding exposure to?
A: In our India funds, post the correction one saw in early April, we added to our funds exposure. Our view was that somewhere around June we should see this inflation falling because clearly last 2-3 quarter showed very weak corporate sales growth. So our financial exposure is about 35 percent of the fund which is probably 4-5 percent more than the benchmark exposure.
Outside that, industrials would be a mild overweight primarily coming through cement companies and we would still be overweight on pharmaceutical names, which we have liked for some time and which have given good results and shown good price performance.
We continue to like consumer discretionary because globally we believe that this is a good situation wherein raw material prices are going down, commodities remain soft and these companies get good pricing power. Particularly in India as we see rate cuts working their way through the economy, we should see demand revival for some of these auto companies, particularly the car companies. So we remain positive on the consumer discretionary names. Our underweights would be essential oil and gas, commodities and metal space.
Q: What about this entire banking space and how you guys are approaching that? What did you make of the numbers plus the expectations from policy?
A: Our large part of the weight would still be biased towards private sector banks. Public sector undertaking (PSU) banks must be good near-term trades but we are still worried about asset quality. A lot of these public sector banks have large exposure to the metal industries and with all these uncertain outlook on the pricing, we need to see a lot more restructuring over there. So I think asset quality still remains an issue for public sector banks. We may have some trading rallies here and there but we still are yet to see peak of the asset quality for these names.
Q: How about something like the consumer discretionary space where numbers have been quite patchy, things like Jubilant Foodworks, Asian Paints but ownership was and is pretty high there?
A: In consumer discretionary, again we will have some auto companies, some jewellery plays, which we have held for some time, we like that and some of the retailing plays but nothing beyond that. The whole logic is that we have seen consumption getting impacted over last two years because of high inflation. Now that inflation is also easing off, rate cuts should leave more money in the hands of the consumer.
The valuations may look high at this point of time but what happens is, should the demand revival happens and the raw material outlook is benign, I think we can get a good margin leverage. So we are reluctant to go to late cyclicals like commodities but we are happy being in early cyclicals that is consumer discretionary. That is the strategy we are following in our regional funds also .We are playing this economic recovery through early cyclicals which is the consumer discretionary space.
Q: What are your expectations on the rate cut front, the bond market has been signaling that rate cuts are quite expensive and one will happen in June when the Reserve Bank of India (RBI) speaks next, what are your own expectations on that front?
A: We have always believed that there are two factors which will determine the rate cut. One is obviously inflation which is going to be very favourable for this year.
But much more than that is going to be the trade deficit because clearly as a central bank, the last thing you want to do is give more boost to an economy which is importing a lot, which has again caused a serious trade deficit and further lead to a currency crisis.
So I think if the trade numbers continue like this which is USD 15-20 billion deficit, we may see central bank taking a break before further easing. So, clearly trade deficit is also an equally important factor apart from the inflation number in central bank’s policy for cutting rates. In terms of our expectations, we expect that until March we should get another 50-75 bps of rate cuts.
Q: You guys have been underweight on oil and gas as a space but some pockets of that have been performing and there is some policy direction over there, would you change your call on oil and gas at all?
A: Our outlook on refining and petrochemicals is not that positive. Again in the PSU oil companies, they are very much subject to these reforms. We have seen a part of that happen and we have exposure to some of these companies.
But one is not sure about the sustainability of these measures. Again this may continue for next 3-4 months but as we go closer to the elections, I think things may again be put on hold. So, clearly one is not really sure about the long-term visibility for these names.