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US Fed may hike rates over next 3 months: Rahul Chadha, Mirae Asset

Demonetisation of Rs 500 and Rs 1000 notes will for next 3-6 months lead to economic activity virtually coming to a halt as people adjust to this new paradigm, but from a 3-5 year perspective, it reduces the cost of capital, inflation, gives more room (to the RBI) to cut interest rates.

, ET Bureau|
Updated: Nov 11, 2016, 12.43 AM IST
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"If economic data is as resilient as before, you may see a Fed hike if not in December then in the next meeting."
"If economic data is as resilient as before, you may see a Fed hike if not in December then in the next meeting."
Markets could see some weakness going ahead with Republican candidate Donald Trump winning the US elections, but if he tones down his protectionist stance, it would be taken positively, said Rahul Chadha, co-chief investment officer, Mirae Asset Global Investments.

In an interview to Sanam Mirchandani, Hong Kong-based Chadha said he remains overweight on Indian equities and would add exposure to the country on further correction. Edited excerpts:


Trump's win has come as a surprise.What is your assessment?
You will probably see a sell off and it comes from the fact that markets hate uncertainty. The key thing to watch out for over the next couple of weeks is the message from the new President and his campaign. If the message is a toned down protectionist message, to improve productivity in the US through infra spends, tax incentives, modernisation of facilities and encouraging US corporates to get the money back and invest in the US -it would be taken positively by the markets.

How does a Trump win impact the rate hike prospects in December by the US Federal Reserve?
The Fed is data dependent and despite whatever Trump has said about the Fed, elections being over, the sense is he will respect the independence of the Fed. If economic data is as resilient as before, you may see a Fed hike if not in December then in the next meeting. Over the next 3 months, you will see a hike.

Can Trump carry out his threats on free trade agreements?
I am sure he will try to negotiate a better deal. To be fair to him, US provided access but didn't see the same level of reciprocation by the other economies. What he is saying has some merit. But there is always a difference from election rhetoric and actual policy. The jury is still out on what Trump is going to do but our view is, we have seen that a lot of these unconventional politicians mature or sober along the way. That's what we hope he will do.

What does Trump's win mean for US' trade relations with China?
There will be some bit of noise to it.There would be some tough negotiations but if you look at the actual numbers it is going to be a lot more drawn out thing.

What is your assessment of the Indian government's move to scrap the Rs 500 and Rs 1,000 denomination notes?
In the near term, it is going to be a painful transition. For the next 3-6 months you will see economic activity virtually coming to a halt as people adjust to this new paradigm, but from a 3-5 year perspective, it reduces the cost of capital, inflation, gives more room (to the RBI) to cut interest rates. It is also healthier for the currency in terms of stability of the rupee because the currency in circulation is more manageable. GST (Goods and Services Tax) and electronic payments will reduce creation of black money. It is not going to be an easy transition. It would be tougher for SMEs (small and medium-sized enterprises) and for rural areas where lot of transactions happen in cash. There are different levels of hardship involved at different strata of society.

Will this demonetisation, push recovery in corporate earnings?
Corporate earnings recovery will obviously get delayed -firstly, because of this note ban economic activity would diminish significantly for at least next three months. Secondly, if you believe GST is coming around April 1 or June 1, obviously, businesses are going to de-stock ahead of it. India is one of the few economies in the Asian region which is biting the bullet and doing the right things that are painful in near term, but bearing growth from a 3-5 year perspective. Investors are willing to look at this short-term pain for a longer-term gain.

What will be its impact on India's consumption story?
In the near term, numbers are going to be bad. All the names which were at 40-45 times FY18 earnings can easily lose 10-15%. Across the region, consumption names don't trade beyond 20-25 times.

Are you still a buyer in India?
We are overweight Indian equities and we have been using any significant pullback to add to our India exposure. Valuations were a reason which had held us back from increasing our weight. Should the market correct further over the next three-six months, we will be looking to add to our India exposure.

Do you expect RBI to cut rates further?
As we go into January, you may see inflation move up a bit because global commodities have gone up. Over the next nine to twelve months we expect domestic inflation to come down because black money will be controlled, globally commodities will correct a bit and currency will be stable. Over the next 12 months, we expect at least another 50 bps to 75 bps of rate cuts.

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