China impact minimal on India; see earnings uptick in FY17: HSBC

There is a scare that if China slows down considerably then it will impact markets globally, says Tushar Pradhan of HSBC Global Asset Management. India, to that extent, has been an outlier as the country is not that much linked to China and the India story is more domestic, but earnings have clearly disappointed for the past two years, he adds.

However, he expects to see significant uptick in earnings in FY17, followed by FY18.

He adds that liquidity in the system is pretty strong and while bankers are not in a position to lend because they have significant issues with capital availability, incrementally businesses are looking to fund growth through other avenues.

Pradhan says there are bright spots in the economy, but whether they will be delivered in the first two quarters is the question here. He expects it to happen towards the end of the year.Below is the verbatim transcript of Tushar Pradhan's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What have you made of the way in which the market has got this huge growth scare? Do you think the Indian markets are anywhere near the bottom? Are you in buy mode at this juncture or do you think you are going to get shares cheaper?A: We make this fundamental mistake most of the time that we think the market is where the economy is. The market is only at best a barometer of what is likely to happen in the near future, and it does tend to get lot emotional. It is also exposed to the kind of international flows that affect the overall markets in the globe as such and here what we are seeing today, probably is the scare which has come from China is that if it slows down considerably then it would mean pretty tough times for the rest of the emerging markets.India clearly is an outlier in that sense, because I believe that India is not that much linked to what happens to China. India story is pretty much domestic, we have had pretty significant, difficult times when it comes to earnings growth and it has been two years in a row that earnings growth has disappointed.So, coming back to your question, we clearly believe that there is a bottoming out, at least on the earnings cycle, and we do believe that FY17 might be the first year to see pretty significant growth and then following it up with FY18 going forward.Sonia: I was looking at some of the funds. Your HSBC Equity Fund has a lot of exposure to some of these corporate lenders, the likes of ICICI Bank, Axis Bank, etc. and we have seen quite a bit of stress come in from sectors like metals. Do you think the worst is over or will we have to face a couple of more quarters of pain?A: I would like to capsulate it and say yes, it is couple of quarters and nothing more, but the problem is not going to be solved in a couple of quarters. I do not think the problem will be solved in that way. We do have to have a much longer time period in mind to really solve this issue of weak asset classes because weak asset classes are not very tactical. They are an outcome of long-term commodity price trends and those, if you look at the global environment are not going to change, over night. So, I do not think these problems are something to just get rid of quickly. They are pretty systemic. They will remain in the asset books for some time.The brighter side of course is the fact that most of the lenders are aware of what is happening. They have taken very proactive steps to understand their risks and I think they are doing very proactive steps to manage the risks there within the portfolio. So, it is not a black and white, it is not whether yes or no, it is not whether the next two quarters are the worst and then we see a bright pastures ahead. It is more to do with the slow grinding downturn that we have seen in the economy, will take its own time to correct and incremental lending will start coming up in other parts of the economy.So, if we get focused on what is happening at the moment, it is not going to see the whole picture. Latha: So, for a fund manager like you what is the strategy then? Do you see yourself churning your portfolio seriously? If you do, what would be the new sectors you would look at?A: Thankfully when we call ourselves portfolio managers, it is a portfolio and at any point of time, you will have sectors, parts of the economy which are likely to be not as hot as the rest and the whole idea is to continue to find the bright spots and to be exposed to those as you go along. Does not mean that there will be disappointments. It does not mean that there will be parts of the economy which will not revive for a while. In our case, we are focusing on the fact that liquidity in the system is pretty strong. Bankers are not really in a position to lend because they have pretty significant issues on capital availability. But, incrementally businesses are looking to fund growth through other avenues. So, if it is not bank credit growth which is growing, we have seen a significant increase in commercial paper (CP) issuances. We have seen other ways of, the non-banking financial companies (NBFC) for example, providing much needed credit growth to other parts of the economy which are growing.So, when I look at in on a portfolio sense, we clearly see niches within the overall banking sector, within the financial sector which we find attractive and that has not changed. If you look at the growth which is likely to come after the bottoming out of the commodity prices, there is going to be incremental demand which will continue to sustain. We are going to see a significant margin improvement on the basis of lower interest rate costs as well as lower commodity costs. So, those sectors will actually use up the lower cost to show higher margins.So, there are bright spots in the economy, but it is not very clear today that if those will actually be delivered in the first two quarters of this year. It is likely going to happen probably towards the end of the financial year.Sonia: In your Midcap Equity Fund, you have names like Mirza International which have given very good returns in the past, but now have started to disappoint on earnings. What do you do with them?A: I would not speak specifically about stocks, but generally, I would explain that the strategy there is on consumer discretionary and consumption growth rather than consumers. It is something which we believe is a very longer-term trend and yes, while there might be an off quarter here and there, the significant story here is about sustainable growth which is going to be very much evident in the next five years or so. So, I think we continue to be very positive on each of these names within the portfolio.Latha: Consumer durables, discretionaries will be a top sector for you?A: Again, not saying as much, as I said, it is a portfolio approach. There are companies within these sectors which look attractive to us. I think the stock specific nature of these opportunities is what we look at rather than kind of taking carried away by the sector as such.