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China, South Korea better than India on risk-reward: Rahul Chadha, Mirae Global Asset Management

Right now, the market believes that the worst of the policy measures are behind us.

, ET Bureau|
Updated: Oct 09, 2017, 10.22 AM IST
rahul chadha-mirae-FINAL
" If the festival season is disappointing, then obviously India will underperform and that's when investors may use India as a funding source to move money to other markets.."
China and South Korea are likely to see higher flows in the Asian region going forward than India as the risk-reward is more at tractive in these markets, said Rahul Chadha, Co-Chief Investment Officer at Mirae Global Asset Management. With a gain of about 20%, Indian benchmarks are high up among Asian markets in terms of returns this year. In an interview with Sanam Mirchandani, Chadha, who is based in Hong Kong, said this does not mean India will get zero allocation, but the incremental allocation would be lower. Chadha does not see steep correction in the local equity market unless the view on global growth turns negative.

Edited excerpts:

Can the Indian markets continue to rally the way they have been this year despite slowing economic growth, high valuation and lacklustre earnings growth?

Earnings have been lacklustre and we have seen earnings cuts for India. That happened mainly due to two game-changing events: demonetisation and GST. We have to look at this in the backdrop of improving global growth. With this as the backdrop, markets are still holding on well. Should you see poor festival season, global growth looking down or going down, then your fears would come true. Right now, the market believes that the worst of the policy measures are behind us and we will see the fruits of these measures in the coming quarters in terms of market share gains for the listed companies across sectors.

Do you see money flow going towards other markets rather than India? If so, which are those markets?

Since April, China market is outperforming significantly because valuations are cheap there and things are improving on the margin front whereas in India, we have seen earnings cut happen and valuations have become more expensive. If emerging markets (EMs) get more money going forward, other markets will get a higher share.There is a better risk-reward opportunity in China, Korea and rest of Asia. India is a structural secular story so it is not going to be a zero fresh allocation but the number which one would allocate incrementally to India would be much lower. China and South Korea will get higher flows in the Asian region.

Do you see any major correction in the Indian markets in the near term?

As we are likely to see improving global outlook, corrections are going to be shallow -plus you have got institutional funds which are sitting on huge amount of liquidity so any corrections are going to be bought into.One should not expect a deep correction until the view on global growth turns negative. What happens in a market like this is there is improving growth factor and things are expensive, they go through a period of time correction. There is some interesting opportunity in fairly large IPOs which are happening in the market. These big IPOs should generate interest because this is a new sector and people would want to diversify outside the traditional strongholds of consumer and other sectors.

When do you see a broad-based earnings recovery happening in India?

You don't have to look at a recovery period on an annual basis. We have to see it on a quarterly basis because we had all these game changing events like demonetisation and GST.If demand comes back strongly in the October-December quarter, that would be the number to look at. If the festival season is disappointing, then obviously India will underperform and that's when investors may use India as a funding source to move money to other markets.

What is your outlook on interest rates in India?

A 25 bps rate cut can happen but with this global outlook of growth picking up, central banks doing tapering and Indian inflation also looking up, the window of opportunity is low for the central banks to cut rates.

Are global markets being complacent about the geopolitical risks such as North Korea?

Markets got worried about Brexit only to see the economic recovery overcome that risk. Similar thing happened when Trump came. Market is looking at the improving global economic recovery. If you look across the world, there are more than 50 countries that have their PMIs in an expansionary mode. Till the time some action happens market is willing to dismiss that (North Korea) as rhetoric.

What's your take on EMs without reference to any specific country?

Asia is not expensive on a price to book basis. There are pockets like Indian consumer staples which are expensive but overall from a market perspective it is at a mean level. Over the last six years, DMs (developed markets) have outperformed EMs more than 50% and today for the first time the growth differential of EMs over DMs is turning in favour of EMs.Most investors globally are underweight EMs and over the next couple of years they will use every pull back to increase their allocation to EMs.From an India-specific perspective, because people were big time overweight on India, markets like China and South Korea will get a higher proportion of flows within Asia in the rest of 2017 and 2018.

Do you think EMs will be able to withstand the withdrawal of balance sheet by the US Federal Reserve?

If you look at what happened around August-September tapering season in 2013, some already had weak vulnerable fundamentals. India's trade deficit was running around 3-4%. Similar was the condition of Indonesia. Now economies are in a much better condition. If this tapering or interest rate hikes continue in 2018 and 2019, then investors will begin question the expensive valuations globally.

Do you think it is worth buying consumer firms in India at these levels?

Valuations are not cheap but we have taken a 3-5 year call and these companies are at the forefront of the technological innovations for their sector and the category they are operating in. Add the benefits of financial inclusion such as Aadhaar, these consumer companies are going to benefit. On the other hand you have consumer discretionary companies which will benefit as incomes rise, consumer tastes change. Segments like jewellery or apparel retailing that were largely unorganised will benefit disproportionately.

Which are the investment themes likely to stand out going ahead?

Banks and insurance are spaces that we continue to like and within that, we like private sector banks. Parts of the consumption sector like retailing -whether it is food, apparel or jewellery -are an attractive opportunity.Historically we have liked autos but right now we will probably confine ourselves to leading passenger car manufacturers. The disruption as we have seen in 2017 is coming much faster in the auto segment. Clearly there is a shift towards electric vehicles, which is not going to be profitable initially. One can look at industrials. These stocks from a 3-4 year perspective have not done that well and what we have seen now is significant pick up in government ordering in terms of the infra spends. There are pockets which are interesting in energy. Reliance has been in our top two-top three holdings for the last 12-18 months and it has done particularly well. The best for oil marketing companies is behind us so one should be selective there. There will be focus towards cleaner fuel and renewables going ahead.

Is it time to buy into IT and pharma?

It is too early to bottom fish in software and healthcare space. Margins will come down over the years and you will see earnings cuts in IT. The leading healthcare companies will revisit the US generic model and may look at biosimilars or speciality drugs which requires significant upping of spends for next 3-4 years.The next two-three years are murky for their US business which is about half of their revenues.

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