Fed hike will have sentimental impact; like pharma: HSBC

It is now more or less a consensus view that the US Federal Reserve is in line to raise interest rates, says Tushar Pradhan, CIO of HSBC Global Asset Management (India).

The natural fallout of a rate hike is a strong dollar, which in turn implies weaker currencies across emerging markets, he explains. "This also means cost of funds will become dearer and while in absolute terms a 0.25 percent rate hike from 0 percent may not mean much, sentimentally it means a lot — it signals that the era of absolutely free money is over," he told CNBC-TV18.

As far as Indian markets are concerned, he advises investors to take a portfolio view on the pharma sector instead of a single stock. He believes Indian pharma companies are well placed to exploit global opportunities.Below is the verbatim transcript of Tushar Pradhan’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Couple of global events to watch out for. Janet Yellen’s statements yesterday seem to indicate that she is satisfied with the economic recovery so far. Would you pencil in a rate hike on December 15 and what does it mean for India stock holders? A: I think it is more or less a consensus view now. I think the statement so far from the US Federal Reserve seems to indicate that they are in line for a rate hike. They have promised this for the entire year. We have been waiting with the kind of policy flip-flop that we have seen for a while but with the kind of statements coming through not only from Governor Yellen but all of the other Governor’s on the board of the Federal Reserve as well, it appears that more or less the rate hike is here and it might well be that they might actually announce it in December. What does that mean for India?  That is a million dollar question or a billion dollar question whichever way you look at it. I think the natural impact of a rate hike in the US would mean a stronger dollar and that means weaker currencies across the emerging markets. Typically this also means that the cost of money becomes a little dearer in the sense that from near zero rates we were going to maybe 25 basis up from there. That doesn’t actually mean much from an absolute sense but from a sentimental perspective, what it is signaling is that the era of absolutely free money is over and the carry cost could now climb a little higher in terms of whatever was possible from previous times. So, I think the direction is more important. The more important question is not whether she makes the increase now but what is the rate of increase in the interest rates in the US in 2016 and I think that is the bigger question now to answer.Sonia: I was just going through some of your funds and reviewing the performance of your funds. One of the most aggressive performances have come in from your midcap equity fund which has give a return of 48 percent in the last two years and if you take three years then it has given you about 25 percent or so. You have had some great performers in this fund, names like Aurobindo Pharmaceutical, Cholamandalam Finance, etc. My question is do you still see a lot more value in the midcap space and if yes what are the pockets, sectors that you would be bullish on in midcaps? A: I think midcaps has been a space which has been a bright spot for our economy in the last two years and thanks to our fund managers,  they have done exceedingly well trying to choose the right kinds. People tend to think of midcaps as a generic class but there is a lot of quality out there. You have to remember that India still is a developing nation and most of the businesses which we classify typically under midcap are the early stage largecaps. So, in a sense that if you find a company which has tremendous scale possibilities, a very sound management at the top and pretty significant market growth potential giving the demographics of our country then you have come up with a winner. On top of that if some of these midcaps establish some sort of competitive advantage or in a more typical norm as is described as a mote then you have pretty secured growth coming for significant periods of time from here on. The issue with midcaps is that they come with a lot of volatility. Some of these companies are unable to sustain longer periods of difficult economic times and that is a risk that these companies carry. So, it is not a given that midcaps will actually outperform in every cycle. We have had difficult times prior to the two years that you mentioned in terms of our choices of midcaps as well.I think it is not a very even game from here on but we do feel that there are certain pockets defined with the parameters I just ascribed that if companies display significant competitive advantage, have the scope to scale up without increased requirement of borrowed capital, these are the companies which are winners in the long run. India is poised for an economic growth up cycle and all of these companies within that display all those perspectives of pretty significant and sustained growth from here. Latha: Most of your funds have a lot of investments in the private sector banks. I noticed Axis Bank, HDFC Bank, ICICI Bank and Yes Bank figuring in practically all your funds. Will you add more to this or will you diversify into NBFCs or to public sector banks at all? A: The banking space especially the banking and financial space together has been a very challenging one for the last two to three years for all the reasons that we know that the economy is going through a down cycle which means that the assets which the banks have are under pressure for various reasons that they are unable either to start their projects or to have significant cash close to support their operations. Most of the larger exposures of course are in the public sector banks. On the private sector what we have are two things. One is their ability to go into the market to raise fresh capital without any issue. If you look at the capital requirement, let us take back a bit and say okay if I want to say that the banking sector is going to grow from here because the economy is going to grow, who has the potential to raise capital to be able to feed this kind of growth. So, from a public sector banking perspective, there are significant challenges in terms of how much the government can put in the extra capital for this growth and what is the potential for these banks to go on their own to the stock markets to raise the capital which is required. As oppose to that with a much better quality book that most of these private banks have, they have much more potential to raise capital in the coming growth period and they will probably increase their market share going forward. So, I think that is one of the reasons why we prefer them. From an NBFC perspective also, I think this is where a lot of financial disintermediation is happening. They can reach a lot many more markets than the organised much more larger banks are unable to especially when it comes to either small asset finance or even personal finance for that matter. Probably they know their clients a lot better than what a typical nationalised bank will be able to do. So, in that sense there is opportunity across the board. We do have also a lot of disruption by way of the microfinance players in the field. So, it is a pretty interesting place to be in but one needs to be very careful about how the eventual economy progresses and how each of these players will take advantage. As I said, our portfolio positioning represents the attractiveness relative to other markets or other sectors for that period. This is not really a definitive statement but as we go along we will continue to see opportunities and that portfolio positioning may change as we go along. For entire discussion, watch accompanying videos