Expect FDI in retail, aviation post Cabinet rejig: Mirae

Rahul Chadha of Mirae Asset Global Investments is hopeful of reforms like foreign direct investments (FDI) in aviation and retail coming through post the Cabinet reshuffle.

However, if the expectations on the reform front aren’t fulfilled and inflation remains sticky then there may a negative impact on the quarterly GDP data. "We may have a 5-5.5% quarterly GDP print and it is then when the markets would probably get disappointed and correct," he cautioned. Below is the edited transcript of Chadha’s interview with CNBC-TV18. Q: How important would today’s outcome be? Do you think a lot of the kind of money that’s come in is because of expectations from the ECB (European Central Bank) today? A: The reason why Indian markets have held on from June particularly is that, we are seeing slowdown in other economies in the world. Particularly with China there are issues about structural growth. There are concerns that this commodity rally, which had a bull market over last 10 years has come to an end and India is the natural beneficiary of that. At the same time there are a lot of hopes also built up about reforms in the post Presidential window of next three-four months. If we don’t see that happening and if inflation remains sticky, it is highly likely that the quarterly GDP print may surprise negatively. I mean, we may have a 5-5.5% quarterly GDP print and it is then when the markets would probably get disappointed and correct. Q: Now that we have a new finance minister hopes are high for some reforms to come through. What in specific do you expect by way of reforms? A: There is a reasonable expectation for FDI in retail. There have been certain press reports that the government would clear it and then leave the onus on individual states to pass it. So, that is something which should go well with states also and that is something investors look forward to. Outside that, if we have some bit of consensus on FDI in aviation, that would be of much help because we clearly see some of the airlines under deep pressure. Banks have a reasonable exposure to that. So, that should be helpful from the banking system also. Q: Do you see the markets grinding in a range for the rest of the year or do you expect or see more downside after the macro numbers that you alluded to? A: We have global markets in the current stay. Plus-minus 10% because 10% lower again valuations becomes attractive. You start looking from a three-year time frame. But again if negative momentum continues for six-nine months then the range may be broken on the lower end also. Q: What in your mind is the biggest risk that can potentially break the market below the range that you have spoken about? A: There were three concerns which were plaguing investors for India. First was the fiscal deficit which continues to remain along with high inflation. Second was policy inaction which is where the hopes are. If things don’t improve over next three months, it can turn negative and we can see a sell off. Third was on rupee depreciation which was the trade deficit. Thankfully what has happened is post 20% rupee depreciation - we have seen imports cool off. Exports have fallen much lesser as a result of which we have got trade deficit for last two months, at USD 10 billion which is a healthy number. If you add invisibles on top of it, the current account is sub 1%. So, currency has stabilized. Inflation should trend down so that RBI can cut rates which is much necessary for the economy. On top of that you need to see some policy action from the government. Else we run a serious risks of GDP print going lower. That would disappoint the market and we'll see sell off. What’s happening in markets is the whole breadth of the market is becoming narrower. Six-seven months back people used to like banks - that’s narrowed to private banks. IT was liked - demand issues are there for the sector. Pharma and consumers are liked by investors now. But then if growth momentum slows down, even these sectors would not be spared. Q: How important would be the ECB decision today? If there is no clear impetus or clarity on buying bonds, could there be a global sell off in your eyes? A: What changed the course for markets last week was the statement from ECB president that they will do whatever necessary to defend euro. This was reinforced by the German chancellor and French prime minister. Bundesbank has also given a statement that they are okay with ECB coming and not letting sovereign yields spike beyond a point. But they don’t approve mass buying of bonds. So, there is some ambiguity in that. Bundesbank has been a conservative central bank which is why they really don’t want to let go of it at one time. As we have seen in the past, if yields spike beyond a point, ECB will intervene. At the same time Germans would also like all stressed nations to do their own bit on cutting the flab and cost in the economies and embarking on fiscal austerity. Q: Money has been very strong for the last 1-1.5 months. Where do you think it is coming from, the FII flows? A: I think a part of it is in ETF (exchange-traded fund) flow. We have seen some of the ETFs getting huge inflows. It is part of the reallocation money also which is coming to EMs (emerging markets). Most investors were kind of underweight equities and that’s changed a bit. But if the earnings traction doesn’t pick up over next couple of quarters, we can see some of this money going away also. Q: What do you do with the defensive sectors? Pharmaceutical has been the star for the last couple of days, FMCG has been holding up very well after Hindustan Unilever numbers. Given valuations would you still buy them? A: If we see some of these companies, staples, discretionary coming and guiding lower, you would see some bit of a correction here because some of the names are trading at 20-25 times earnings. At the same time I think a bigger pain would be felt in rate sensitives because market was anticipating some bit of a rate cut. If the inflation is sticky and GDP momentum doesn’t pick up over the next two-three quarters, we get a bigger growth scare in the interest rate sensitives.