Next 18 months to be good for global equities: Rahul Chadha

Latha: Are you expecting this risk on to continue for a bit and will that outflow of emerging market (EM) funds that we saw in the past six weeks, now turn into inflows?

A: Let us looks at the background for the outflows. Obviously, markets were worried about the election uncertainty and that is where the outflows happened. Our belief is -- if we see Trump's victory speech, it is lot more inclusive, it is lot more moderated and the focus is - as he talked during the campaign about making America great again by focusing on productivity improvements, through infrastructure spends, by encouraging corporate to get the cash back and spend in the economy.

I think all this is good from economic growth perspective and US being the largest economy. If US do well, it obviously pulls rest of the world up. I think that is what markets are looking forward to because for the last one or two years we all have been debating that the monetary policies are not working, the efficacies of quantitative easing (QE) is diminishing day-by-day and people were looking for a fiscal response and this is where you get the big fiscal response and that is where at least for a year or 18 months - it should be a breather for markets and that is why you see US also ended up in green last night, markets are positive in Asia also.Sonia: Will there be a higher risk premium attached to equities in the medium-term, global equities, just because there is some amount of uncertainty as to what his eventual policies would be?

A: Of course, if you take a three year view, you will see all these events which talk about protectionism and this should come more towards lower end manufacturing jobs, you look at people who voted for Trump, these are high school educated whites basically. So you will see more of it. So one year to 18 months, two years it should be okay, people would be excited about global growth coming back but as you get into difficult geopolitical situations whether it's Middle East or relationship with Russia. You will get more and more of these noises, which are not comfortable for market and that would increase risk premium as you go into trade negotiations; these negotiations would be lot harder, you will get sound bite which will not be very encouraging and you will see overall risk premium increase for equities.

However, what also happens is in next 12-18 months bonds would price for perfection and with fiscal spends happening, bonds will selloff and it may happen that as people get confidence about growth coming back, a part of this money which was being parked in fixed income may move to equities.

Anuj: From Indian market point of view is there a trade available on IT or pharmaceutical where we saw some global rally as well yesterday, now that the event is out of the way?

A: I think IT looks interesting again from one or two year perspective. Structurally the sector is mature, so one has to lower the return expectation from the sector. One got to compare these Indian IT companies to a mature or hardware companies you see across the region, something like TSMC where earnings growth is 8 percent, stock have a 4 percent dividend yield and that is how you will see these IT services company evolve. In a year or two, they will pay 50-70 percent of their profit as dividends.

However, in near term you can see a cyclical recovery. We have seen for the first time, US financials gave good quarterly earnings and this momentum continues for next 12-18 months and that is where you can see a kind of cyclical recovery for the sector but longer term the threat from cloud, the threat from digitalisation remains. Obviously, we are looking at a much higher base for these companies to what it was ten years back and that is where the growth moderates.Latha: There was another theme that the markets were beating to yesterday, the demonetisation of Rs 500 and Rs 1,000 notes. How will that influence your stock picking?

A: In near term we are clear that it is going to be painful transition for the economy, when we talk about Rs 500 and Rs 1000 note demonetisation that impacts 86 percent of the currency base. So it is going to be painful, it is going to be painful more so in semi urban, rural areas where large amount of transaction is done through cash but longer term it is extremely healthy for the economy.

Our problem, always in the country was that interest rates were high and it handicap one when one was building infrastructure in the company because cost of capital was high. So in due course if you reduce the size of parallel economy which is going to happen because of demonetisation, which is going to happen because of GST coming, all Jan Dhan accounts being opened. Obviously inflation moderates, get room to cut rates more aggressively in the medium-term perspective. So that is good from economy perspective for medium-term, but near term, in next three-six months it is going to be painful.

However, one is willing to overlook this pain because if we see across the region, not many countries are doing the right thing. So here, if we see with the current government, one is highly encouraged by the fact that the current government despite having, so-called, a trader base went ahead with GST, which could have negatively impacted their core voter base, they have done this which again impacts the same voter base. So the government is picking the right things which may be painful for the economy in short-term but longer term are extremely positive and the other positive which not many people are able to put a number to, comes from the demonetisation is, not 100 percent of the currency would come back. So if you look at currency in circulation - that number is about USD 250 billion, so if you presume, 20 percent of the currency doesn't come back and we have already seen stories of sacks of notes being found burned etc that may lead to about USD 50 billion gain for Reserve Bank of India (RBI).