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We like pharma selectively, hospitals offer deep value: Rahul Chadha, Mirae Asset

, ET Bureau|
Aug 01, 2019, 07.55 AM IST
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Rahul Chadha-Mirae

Highlights

  • Need to watch govt action over 6-9 months to restore confidence.
  • In short-term, China, Korea markets more attractive.
  • One should be a buyer on dips in consumer stocks next 2-3 qtrs.
Foreign investors are questioning the direction in which the government is headed after it announced an increase in taxes on the highest income bracket in the budget, said Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments which has $135 billion worth of assets under management. We need to watch what the government does over the next 6-9 months to restore confidence, said Chadha. In an interview with Sanam Mirchandani, Hong Kong-based Chadha said he is bullish on insurance companies and the hospitals space in India besides select consumption stocks. Edited excerpts:

Foreign investors seem to be upset because of the tax proposals in the budget.
Post the budget particularly we have seen FII flows turn negative to the extent of $1 billion-1.5 billion. The question most foreigners are grappling with is what direction the government is going. If the government comes and does the tough measures which improves competitiveness and productivity, the slowdown will be taken in stride. Those top measures can be on labour reforms and divestments. The government needs to revive housing. We saw the FM talk about the rental policy. That needs to come out in the next 3-4 months. That will boost the housing sector which will then boost construction.

Has the surcharge on some foreign funds impacted India's standing?
This taxation is just one of the issues and when people do a change in stance its never only on one issue. Over this year we have seen the government take a more socialist approach. We need to see more stress from the government on creating a level playing field for businesses, staying out from the business itself and attracting more investments whether it is from the domestic private sector or from foreigners. In the near term there would be markets like China, particularly the Hong Kong listed-stocks, and market like Korea which would be attractive. In the medium term, India is a very powerful story and the economy is at a cyclical bottom. When India comes out of this slowdown would be contingent on what the government does over the next 5-6 months. Some of the stocks were genuinely expensive. We have been reducing consumer-focused stocks (exposure) including staples and consumer-focused banks. In quite a few of these, the market was paying peak multiple for peak profitability. Those multiples cannot be sustained.

Do you see a revival in sentiment soon?
Let's look at what the government is trying to do over the last 2-3 years. Parts of 2 018 and 2017 were marked by GST implementation pangs. Parts of 2016-17 were marked by demonetisation pangs. The economy could not really recover from it. That kind of explains what we are seeing in the system where you have corporate defaults at a record high, NBFCs have liquidity and asset quality issues and then the liquidity started tightening from August-September.

The market is going through a painful cleansing. When things were a bit slow in let's say 2016-18, they were compensated by the easy availability of consumer financing. That had to run its course some day. Consumer financing took a breather and suddenly what we have is a pronounced slowdown in the economy. The gloom has been more post the budget because all the corporates are coming and admitting that there is a pronounced slowdown. What we have seen from the government is that we have had handouts or support for the poor families which is good from an economy perspective and mitigating the social divide. In the budget, the government further increased taxation on the highest (income) bracket.

That's what led to this bit of a despair and frustration that look, is the government taking the easy path to growth or easy path to remaining in power? From a medium-term perspective this is extremely negative, and this is not what global investors bought India for. They bought it for the individual leadership of Prime Minister Modi, productivity improvement, and reforms.

Do you see the RBI cutting rates further?
We will easily see 50 bps of cut from here. Unlike the historic number of 2-2.5%, the India-US real rate differential is standing at about 3-3.5%. We will easily see rate cuts and with the kind of slowdown we are seeing in the economy, and with inflation not being an issue anywhere in the world, lot of these rate cuts would be front-ended. I would not be surprised if we see 50 bps over next six months.

Which sectors should investors look to buy in this uncertain market?
Great companies may not be great investments if one buys them at exorbitant valuations. We like the insurance space. Then there is value in hospitals. I am looking at sectors which were out of favour, have not done much in the last 2-3 years, and which are seeing demand coming back so there will be positive operating leverage. We like pharma selectively and hospitals in particular offer deep value. We are going selectively into some of these consumption names, if the franchise is strong enough, it is not impacted by ecommerce or technological disruption. One should be a buyer on dips over the next 6-9 months in some of these consumer franchises.

Are risks to India more domestic than global currently?
Globally, it is a fragile situation. We have seen the peak of US growth rate so towards the end of the year the sense is US GDP growth will go more towards 1.5-1.75%. Globally things are slowing but with proactive central bankers you are not going to see the collapse of growth. On the trade war, US growth is slowing and incrementally the pain of all the tariffs is being borne out by the US consumer; both US and China are going to be sensible not to escalate the trade war. We have seen the peak of globalisation. That's a reality we as investors have to live with. That takes away some of the growth but doesn't really pose a threat. Because of slower global growth, oil has not really spiked up.

As long as the situation doesn't go out of hand, I don't think it is a significant negative from an India perspective. The concern only is valuations are not cheap. Investors are happy to deal with a mild near-term slowdown but if they see the government going in the other direction — not working on attracting investments, not working on improving productivity in the economy and focusing more on the easy handouts and taxing rich — that's where investors may lose confidence and their belief in India would be shaking. We need to watch what the government does over the next 6-9 months to restore confidence. India remains a big overweight for us in our Asian portfolio.

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