See downside in banks, FMCG; RBI won't change rates: Mirae

Rahul Chadha, head of India investment, Mirae Asset Global Investments (HK) expects a downside in the banking sector on the back of rate hikes seen over the last two-three weeks. The consumer stocks are also likely to fall due to steep valuations.

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He believes the IT sector would relatively hold on in this market and will provide the safe haven at least for the near-term after the companies posted good earnings due to fall in the rupee.
With regards to the market, he expects it to fall by another 5-7 percent, but if the government continues doing right things, there could be more flows from longer-term investors into the market.
Meanwhile, he believes the Reserve Bank of India is unlikely to change rates in its monetary policy on Tuesday. Below is the verbatim transcript of Rahul Chadha's interview on CNBC-TV18 Q: Last few months have not been great for foreign institutional investors (FIIs) flows, how do you expect the mood to be post the Fed meet later this week?
A: For current account deficit (CAD) countries like India and Indonesia, there is a sense that the new incoming Fed Chairman may do the tapering. There is a bias against the easy liquidity.
On the other hand, with the economy slowing down, trade deficit is coming down and there is a sense that post a sovereign bond issue from the country, we may see reserves also getting beefed up a bit. So, there are near-term headwinds but it is more like an ugly contest where each of the economies across the region has its own set of issues. Q: Do you expect more downside in the Indian market given the kind of growth numbers and the earnings we were seeing?
A: Banks may have some downside. The kind of rate hikes or the quasi hikes we have seen over the last two-three weeks were a bit unexpected. With slowing growth and current valuations, we may see bit of a downside in banks. Outside that, the expensive consumer names may see bit of a downside. So, we should expect 5-7 percent lower from the markets but should the government keep doing the right things, we should see more flows from longer-term investors into the market. Q: Do you think the RBI policy will do much for the market tomorrow?
A: Not much. They will maintain the status quo. Whatever had to be done, they did over last one month. So they will maintain the status quo.
_PAGEBREAK_ Q: What about IT? What can it do to hold the market up even from here?
A: In IT, as rupee has depreciated, we have seen good set of numbers and increasingly concerns have eased on the outplacement clause in the US, people have become lot more positive on IT. So IT would relatively hold on in this market and provide the safe haven at least for the near-term.

Q: How do you see the broader market performing because that is where the problem is while a handful of stocks have held the index up, the broader market continues to drift lower?
A: The broader market is clearly weighed upon the key concerns which are high current account deficit, which has clearly constrained the sentiment and easing interest rates. Over the last three-six months, we saw some of the policy logjam being ended where the government doing the decision-making but as we go closer to the general elections, corporates are reluctant to spend.
Over the next six-nine months, as currency stabilises, as rate cuts resume, as we have a new stable leadership, this logjam would ease out and we see the broader market responding. Outside that, you will again see people taking refuge in exporters where earnings momentum have been so far good in sectors like IT, pharmaceuticals and selective consumer names. Q: Do you expect to see India receiving reasonable amount of inflows over the next few months? Does the global mood suggest that we should be now learn to live without much lukewarm flows than we saw over the last one year?
A: We should be a lot more subdued in terms of flows over the next three-six months. There are big events in terms of general elections that are lined up. Clearly, the rate cuts that were expected gets pushed for over six-nine months and most investors including us are overweight on India in the regional portfolios. So the inclination to India at this point of time is limited.
At the same time, one has not reduced exposure to India because again there are issues with almost all countries in the region. So whatever one likes in India, which is some consumer staples have good earnings story or some auto names with global growth momentum, the earnings traction is there, maybe a bit of a stretch on valuation but one is willing to live through that over a two-three year period but the appetite to add India at this point of time is fairly limited. Q: Do you see expensive sectors being prone to some kind of valuation risk where they adjust on the way down as growth disappoints like in the case of Hindustan Unilever (HUL) last week where even some of the investors were hiding in these stocks or sectors might begin to take some of the profits?
A: That is bound to happen. We have seen that across the region. Consumer names, which were darling of investors and are not being backed by earnings are seeing profit booking or some reduction of exposure from investors. This is why in our portfolios also, though we may like some of the secular stories, we are fairly mindful of the bet that valuation should not be exorbitant.
There is a bit of a stretch but not something as 40 times one year forward earnings and that has to be backed by earnings momentum. Q: How are you positioning your portfolio right now in terms of allocations?
A: Within our regional funds, we are overweight on India but that would be largely to exporters. Within our country funds for India, we increase that exposure to IT post decent set of numbers from the IT companies. Some comfort on the immigration bill and we produce a bit of a financial exposure.
Over the next six-nine months as the currency stabilises, as the reserve stabilises and once we see more evidence of the easing cycle, we look to increase financial exposure. However, in the near-term collateral damage can be huge, so, there is fair bit of balance sheet stretch in mid-corporates.
If you have rate cuts, some of these things can be eased out as these corporates get funded but as those rate cuts get pushed even further, we will see more vulnerability on account of these stretch balance sheets in corporate India.