Buy India on dips; Fed to hike rate early Q3CY15: StanChart

Below is the verbatim transcript of Clive McDonnell's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: How should India read the global cues, or how should financial markets read the global cues? Will the Greek issue kind of overshadow at some point in time the European Central Bank (ECB) bonanza?

A: I think that it is unlikely to overshadow the quantitative easing (QE) announcement by the ECB based on the conciliatory tones that have come out after the election. I think it is also important to keep in mind that 70 percent of the Greek electorate want to remain within the euro zone. So it is a need for compromise on all sides and at the end of the day markets like compromise.

Latha: What about the Federal Open Market Committee (FOMC) itself, how are you going in to this event? Any expectations that there could be greater dovishness because now it is just 1.1 dollars to a euro that might increase the Fed’s worries about export performance?

A: Fed does not monitor the currency as such. With regard in terms of interest rate policy and its inflation target and full employment, obviously the drop in oil is a concern but the Fed’s mandate itself is core consumer price inflation. So that factor is likely to mitigate some concerns they may have that the follow-off in inflation could impact their price target. So we continue to be of the view that the Fed will go for early Q3 interest rate increase as part of its strategy of normalising interest rates, not tightening rates but beginning the process of normalising interest rates. 

Sonia: Is there any trigger globally that has the potential to derail equity markets or will this bullish trend in equity markets continue in the first half of 2015?

A: I certainly don’t think it will be a straight line up in the first half of the year. I think that there are number of factors that could derail the rally in equity markets and prime amongst those is a reversal in the strength of the dollar, a reversal in the weakness of oil or some on the political front particularly in Ukraine, some issues there. So I think there are a number of factors that could lead to a correction in equity markets indeed it is quite likely we have had an incredibly strong start to the year particularly in India and I think a correction would be absolutely normal. I would certainly be a buyer on weakness but indeed there are number of factors that could derail the straight-line up effectively that we have had since January 1.

Sonia: You did mention that you will be a buyer in the weakness in the Indian markets, what kind of trajectory do you think Indian markets could see this year, will it continue to outperform other emerging markets?

A: It is our core view that India will indeed continue to outperform global emerging markets but frankly that is not a very high bar. When we think of non-Asia, Brazil, the challenges in Turkey, the challenges in Russia, they are outperforming emerging markets (EM) is not a particularly high bar in my mind, more specifically within an Asian context, India can outperform Asia ex-Japan into 2015 particularly because given it has -- the new administration has done a good job in terms of under-promising and over-delivering so far and as we move into the Budget, it is going to have the wind in its fiscal sales even though taken some of the painful decisions on subsidies already. So I think the market is going to be quite positive heading into the Budget, the risk is though again similar to markets in general globally sort of overstretches itself and we see a mid-course correction, again that is totally understandable and I would also again be a buyer on weakness though.

Latha: In that case, what are you looking at in terms of near-term and one year gains from any of the benchmark indices and who might be the leaders of the Indian rally, sectorally or stock wise?

A: I think in terms of returns, we look for about 15 percent return for the Sensex in 2015. That is slightly ahead of earnings, basically it takes into account probably the dividend and earnings growth for India looking at over the next twelve months or so. In terms of a sector perspective, we don’t have a relatively in line with the consensus I would say - the banks probably have a slight preference for state banks over private banks given the run up in valuation amongst the private banks.

One nuance is that we do like finance companies. We think finance companies at the moment such as LIC are likely to be big beneficiaries if the Reserve Bank of India (RBI) were to follow through in a much stronger or much bigger rate cuts compared with the market thinks at the moment. Beyond the banking space, obviously it is the infrastructure names and potentially or specifically cement that we would favour as an industry.

Latha: Have you all drilled down this issue at all with respect to Indian stocks, the euro falling from very recent highs, 1.3 to 1.1 in a relatively short time, does that influence stock selection at all?

A: India in general is much more a domestic oriented market as opposed to an export oriented market such as others around the region. I think for individual names, the impact of euro weakness is a challenge maybe in a pharmaceutical space and the big headline names such as Tata Motors, it is much more dependent on sterling as opposed to the euro. Have seen sterling weakened modestly and I don’t think it is enough to undermine the outlook for margins or for earnings for company like Tata Motors. So in general the euro weakness is not a huge obstacle for the Indian market as they say it is not an export powerhouse like China or elsewhere.