Market may correct over the next 3-4 months: Mirae Asset

After a slew of reforms from the government in the last 72 hours, Rahul Chadha, Mirae Asset Global Investments believes that the policy actions have removed the tail risk looming large on India in terms of sovereign downgrade and the huge oil led deficit. Also, the inflation issue has become far more entrenched in the economy than ever before.

According to Chaddha, we need to see more commitment from the government on curtailing expenditure and kick starting investment-led growth in the economy. Chaddha feels that the Indian government’s actions as well the ECB move will allow investors to go back to stock picking. “We can look at companies which have strong business models available at reasonable valuations and stay invested in them,” he advised. Chaddha added that the investment house is not looking to add too much beta at this point of time since the global growth trajectory still remains uncertain. “Domestically, the slowdown may continue for the next couple of quarters. RBI would be limited in its ability to cut interest rates because of high inflation. From hereon, I think we have seen most of the policy makers globally exhausting lot of their options. We may see the market correcting over the next 3-4 months.” Below is the edited transcript of the interview Q: Will the kind of reforms that we have got from the government in the last 72 hours lead to a rerating of Indian equities in the near-term? A: Clearly, these are positive announcements. A lot of us were worried about the policy in action and this takes away some of it. On the other hand, a lot needs to be done. These policy actions have removed the tail risk, which was looming large on India in terms of sovereign downgrade and the huge oil led deficit that had run up. But at the same time, the inflation issue has become far more entrenched in the economy than ever before. We need to see more commitment from the government on curtailing expenditure and kick starting investment-led growth in the economy. Q: How much upside do you see from here from the current factoring-in of this upside that has happened in the last couple of days? A: Like we discussed before, if the government continues with the reforms, there is an upside to the market. Else, we may see the market consolidate before earnings as they roll over to next year. Talking about QE, we have seen the ECB acting to remove tail risk, which could have come into the global market through the collapse of the euro. With the government doing these little reforms in India, and the ECB talking about maintaining or controlling the yields in the vulnerable euro nations, we can again go back to stock picking. We can look at companies which have strong business models available at reasonable valuations and stay invested in them. It is a reality that growth is much slower than expected. There is a deleveraging going in the world. For the emerging markets, we have got China in its own concern where the economy is going through this re-adjustment phase.  We are seeing a slowdown in India as well. Clearly, that slowdown remains. What these events have done is, they have cushioned the fall and made sure that we don't have a imminent downgrade coming for the country or a sharp fall in the currency. We are going through a slowdown. I think we need a lot more policy action from the government to cover up the slowdown. Q: What are your expectations on the CRR cut and the RBI stance? How are you approaching banking as a space now? A: I do not think CRR cut means much; we have seen RBI monetizing the government deficit, we have seen the OMOs extending to the extent of nearly 3% of GDP. I think the clear thing again is how government controls the expenditure. If we see the non-plan expenditure over last 3-4 years, this number has gone up by nearly 50-60%m which is causing higher inflation in the system. I think serious rerating for the banks, particularly the public sector banks, would happen once we see government controlling the fiscal deficit, which will lead to yields coming down basically. People will then get more comfort on interest rates coming down in a secular way for the economy. In terms of positioning for the sector, we are neutral with a bias towards private sector banks. Q: How would you approach the market now from a tactical perspective in terms of a portfolio creation? A: Honestly, we are not doing much at this point of time still comfortable with the position wherein we are more or less neutral financial, slightly overweight technology, pharmaceuticals and consumers and underweight oil & gas. I think what looks interesting at this point of time is telecom. Currency was one of the key issues for the sector and we have seen competition ebbing in the sector now. Tariffs have become more reasonable now and I think the sector looks good now. Outside that, we are not really adding too much beta at this point of time because we are not really sure on the global growth trajectory. Domestically, the slowdown may continue for the next couple of quarters. RBI would be limited in its ability to cut interest rates because of high inflation. From hereon, I think we have seen most of the policy makers globally exhausting lot of their options. As we go to October, people will get more in terms of the slowdown in economies and we may see the market correcting over the next 3-4 months.