Tough to hold gains from liquidity without fundamentals: Mirae

With the liquidity surge in emerging markets, benchmark Indian indices have gained close to 17-18 percent over last few months but Rahul Chadha of Mirae Asset Global Investments believes liquidity without fundamentals means the gains cannot be held for long.

In an interview to CNBC-TV18 Chadha says market may not really be expecting anything in terms of a rate cut from the upcoming credit policy. But, from a medium term perspective, the central government’s productivity enhancement measures like goods and services tax (GST), dismantling of APMC Act, rural electrification etc mean consumer price inflation (CPI), which has been fairly sticky, goes down creating lot more room for easing of interest rates, he adds.

Similarly, rural economic recovery, jump in foreign direct investments etc. will act as enabling conditions that will bring back earnings growth to support valuations.

He expects automobile, consumer staples and cement sectors to be big beneficiaries of GST.Below is the transcript of Rahul Chadha’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.Prashant: We talked to a lot of investment managers and they all basically complain about what the market is doing. The gains have been extremely strong and flows have been strong as well. Should we just a big thank you to liquidity and enjoy the ride higher, stay invested, buy more? What is your call?A: Actually, you are right. If we see from early February, Indian markets are up close to about 17-18 percent. This is in line with the recent market gains of about 20 percent and we have seen a reasonable amount of liquidity come back to emerging markets (EM). But again, liquidity without fundamentals means those gains cannot be held for long and which is where this positive, that something like goods and services tax (GST), where we had a lot of false starts in the past, has been passed. We have had recovery in the economy, but it is a fairly tenuous and a tepid kind of recovery. The hope is, post good monsoons, we get a lot more clear signs of economic data improving.Ekta: We have a credit policy, the last of Raghuram Rajan’s to reckon with tomorrow. There is nothing which is expected with, in terms of repo, but your sense in terms of how important a credit policy is going to become from a market’s perspective, especially post the inflation target which is put for the next five years?A: I do not think market is expecting anything in terms of rate cuts from this policy. If we look from a medium-term perspective, a couple of steps which the government is taking to improve productivity, something like GST, something like dismantling of Agricultural Produce Marketing Committee (APMC) Act, rural electrification, building up of all these roads in Semi-urban rural area means that this consumer price inflation which was fairly sticky in our country goes down and once it goes down, then you have a lot of room on easing of interest rates. That is a key differentiator between something like India, Indonesia and Philippines where the interest rates are much lower compared to India.Prashant: So, are you sanguine about the growth environment, earnings growth essentially and do you think multiples will stay where they are because you began by saying that liquidity without fundamentals is a problem, prices do not hold for very long.A: If you look at the world, the world today is more of an ugly contest where you look at economies like China, Taiwan, Korea each one of them has their own set of problems. We have got poor demographics, high consumer, growth is an issue everywhere. Within this world, a 6 percent growth stands out, but today if you look at the valuations, you have got consumer companies trading at 6x market cap to sales, the valuations are expensive. So, you need growth to come back. So, the hope is with all these enabling conditions in place which we talked about GST, rural economy recovering, foreign direct investment (FDI) going up from USD 20-25 billion which we saw three years back to hopefully a USD 50 billion in coming years. We can have earnings growth actually come and support the current valuations.Ekta: From a GST perspective, obviously, the negotiations on revenue rates, etc. is going to continue now, but from a market perspective, which are the sectors or the stocks that you might be interested in, going through the whole GST scenario?A: Clearly, the auto as a sector stands out. These companies would not retain the entire margin, but what happens is as you give 60-70 percent of the gains back to the consumer, you get flip on your volumes side, similar thing with some of the consumer staples companies, personal product companies, that is positive. A sector like cement benefits, because freight is a significant amount of cost for these companies. So, autos, consumers, staples, cement would be the key beneficiaries.Prashant: About the price-earnings ratio (P/E) multiples itself across these sectors, do you see any scope for expansion there or it must be earnings led because this thing has been said now, for the last year, year and a half, that well no room for multiple expansion, it is all about earnings doing the heavy lifting. But even though earnings have lagged, multiples have expanded and that you may explain to the liquidity argument. What is your view here from now?A: What happens is if you go back three months, we were all talking of likelihood of GST getting passed, monsoons being good. Now all those events have happened. Now the earnings have to come, the earnings have to materialise and that is where market will take a cue and that is what has happened in the last 6-9 months. You look at consumer banks, they have done much better than the corporate banks in terms of asset quality, earnings growth and markets have rewarded them disproportionately. For consumer staples, the valuations have held, but if you look at 12 month performance, names which have shown good volume growth have been rewarded much more than names which have stagnant volume growths.Ekta: I wanted your thoughts on the entire telecom space. How would you approach it considering that there is new competition which is coming in and the fact that things are going to get tougher on that front, not to mention that Idea Cellular is down 3 percent ahead of its numbers today, top loser on the Nifty? But your thoughts?A: One would like to see Reliance Jio launch over there. How disruptive is the launch, what are they offering and then again see what is something that the incumbents can offer because similar to what we have seen in China, as China mobile launched the 4G services, you China Telecom, Unicom which lagged significantly and it too them huge amount of capital expenditure and a time to catch up. So, let us see what comes from Jio in terms of formal launch and then you will get your own opportunities in terms of whether Bharti can match in terms of competitive offering or whether Idea can match. And that is where it would be a right time to pick these stocks.