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This global asset manager is bullish on insurance, hospitals & real estate in India

ET Now|
Sep 17, 2019, 01.50 PM IST
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Rahul Chadha-Mirae

Highlights

  • Now is the time for bold economic reforms like PSU privatisation.
  • Trade war uncertainty has killed private capex revival.
  • The Asia funds which I run, is close to 15% overweight on India.
In order to come out of the global growth rot, we need a synchronised deflation which is the G-20 coming together and doing large-scale infra spends, says Rahul Chadha, Co-CIO, Mirae Asset Global Investments. Excerpts from an interview with ETNOW.

Do you still feel optimistic at a time when oil prices have gone $20 higher!
Most people say that they like the smile on my face and the smile remains in good and bad times. For a long-term investor, there is always an opportunity. Just before coming here, I saw some of the companies we like are available at a great valuation. That is what one has got to focus on. That is not to say that one is not watching what the government is doing. Obviously, we have realised that there is a firmly deep intrinsic slowdown in the economy. There are lots of issues which are there and where we need the government’s support.

One has to give full credit to the government. The kind of measures that they are doing over the last couple of weeks are positive though they do not cover the entirety of the problem. But at least, the government has been a lot more responsive, which was not probably the case 30 to 40 days back.

I don’t think India has lost out because of the FPI tax. It was general selling in emerging markets. At a time when global growth rate has got rebooted, do you think emerging markets will suffer and that the outflows are here to stay at least for the next couple of months?
We have got multiple issues at work. First, let us look at what is happening globally. We are seeing growth slowing down everywhere. The velocity of money in most developed economies is coming below one because what is happening is we have had this three-four QEs and suddenly markets are questioning how effective the QEs are. It is a bigger issue which is at work globally. So, for us to come out of this global growth rot, we need a synchronised deflation which is again G-20 coming together and doing large scale infra spends.

We have seen the first talks of that coming from Germany which is talking of $30 to $50 billion of infra spends. That is not going to be sufficient but as this pain gets entrenched, you will see a large scale support for infra spends. The fiscal response from Europe and post elections, in the US as well. You will probably have a secular kind of a bull market. Till that time, we are in a slow growth world.

Last year, after seven-eight years, private sector capex picked up. But this trade war uncertainty has killed it. Now businessmen are just hunkering down and we are not seeing any capital investment. The lever of consumer growth which we have been enjoying for the last four-five years, is also getting exhausted. Now, we need to go back to basics, which is to get your investment-led growth back at least for the most part of the developed world, for countries like India and then as that creates more jobs and leads to higher incomes. As the consumer deleverages, you will go back to your normal growth with consumption coming back. Till that time, it is going to be subdued growth.

Would you say the government is heading in the right direction? They are doing the right things and making the right noises. Would you say it is all building up to something positive and more importantly does more need to be done to correct things on the ground?
Absolutely, whatever one has seen these are welcome steps. But let us look at the genesis of the slowdown and this is somewhere around 2011-2012 when we had all these issues with the UPA government on go, no go areas. A lot of these investments got delayed but the economy was never able to come out of it.

Again in 2014, the Modi government came, markets were exuberant but then we had the demonetisation, followed by GST. Again the investment climate has been impacted over the years. Then we had RERA. So too many changes in a fragile economy has impacted the investment climate. What the government has done is clearly positive.

This is the time to be economically bold. What we have seen is the government is politically very bold but with this backdrop of weak global growth, the economy has not really been able to take off for the last seven-eight years. This is the time to be economically bold. This would be the time when one would like to see the government go out and do $40-50 billion global bond offerings over the next 12 months and use that money to take care of all the stalled projects in the economy. There is a cost to the economy when your projects are stuck for three-four years.

Do something big bang like PSU privatisation. There is enormous value in these PSUs but we have seen that the ETF or Bharat 22 method of divestment does not work. You end up marking down your PSUs into the hands of arbitrages. Nobody is interested in that. This is not really the time for textbook economics.

It is good to hear that bullish voice. Are you walking the talk? Are you looking at increasing your exposure to India and buying when markets have been declining?
The Asia funds which I run, India is close to 15% overweight and we have continued to hold on to overweight stance because we believe that from a three- to five-year perspective, it is still one of the best structural stories.

The capital output ratios are fairly decent compared to the rest of the region and compared to China where these numbers come down to 0.5% and growth can come down. The issues with India are cyclical, not structural, which is where one is hopeful that as the government gets a sense of the magnitude of the problem and realises the urgency of it, we can come out of it. There are parts of Indian markets where valuations are expensive and which would be consumer staples. But we are underweight that market. We are in stories like insurance where you are just in the early stage of penetration. Hospitals have not performed for four-five years. Real estate in India is the cheapest it has been across the region. This is one country where real estate markets have not seen buoyancy for the last four-five years. So there are enough pockets of competitiveness.

It is really an issue of how do you get the confidence back, how do you get these animal spirits back because one common comment we get from the government sector is that the private sector wants the profits but they do not want to take the onus of failed businesses. But look for the last five-seven years! Most of these businesses which came up in the 1990s, 2000s, have gone down. The private sector has been scarred enough. It is time for the government to come in because else the private sector would get traumatised and would not invest. So, this is the time the government comes in and takes care of these stalled projects and then we can go back to a long-term growth trajectory.

When we spoke last, you were quite bullish on private sector banks. Within the financial space, have you added anything more or you continue to stick to your good old favourites?
Insurance is something which would get precedence over the banks at this point of time. This is a space we have owned for two-three years. We were anchor investors for some of these IPOs. We like the space and it is doing well. If you look at private sector banks, we like some of the corporate banks which have not grown excessively in the past and where valuations are attractive.

For some of the retail banks, in the next one or two quarters, one would get good entry points because due to time correction, delinquencies, if any, would come in the results in the coming quarters and then these names again become attractive. Private sector banks is a space we continue to be overweight on. One is just moving positions within these names depending on where the risk reward is favourable.

You have also talked about adding select healthcare, seeing a better risk reward ratio there. Would you be selective within the healthcare pack?
Obviously. We are going to get that in terms of return expectations which we have to moderate to 10% to 15%. In today’s world, when close to $16 trillion of debt is giving you negative yield, 10% to 15% is a great return.

We like hospitals. We like businesses which have not participated in the rally over the last three-four years, have good business models and are not impacted by disruptions. These are local kind of plays.

In the pharma sector, it is more nuanced. The business is not coming through in their US pipeline and there is excessive price erosion in domestic businesses. So, pharmaceuticals would be more nuanced. Hospital as a sector looks fairly attractive.
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