Rahul Chadha, associate director, Mirae Asset Global Investments (HK), says in an interview with Krishna Merchant that Indian markets will remain range-bound in the near term. He expects the Reserve Bank of India to raise rates by 25 bps in the next policy meeting. Chadha is overweight on the IT, consumer durables and pharmaceuticals space. Edited excerpts:
In the wake of Quantitative Easing 2 (QE2) coming to an end, what is your view on equities?
Quantitative Easing (QE) has helped the US economy as employment, consumer confidence and ISM (Institute Of Supply Management) data improved over the last 12 months. However, the easy liquidity has also led to inflation in food and commodities, thereby impacting disposable incomes.
After QE2, it is unlikely that we have a sharp correction in asset prices. Progressive demand destruction through high commodity prices is more likely, which would cause correction in commodities and equities.
With this backdrop, we expect equities to be range-bound in CY11 with wide divergence across sectors. Growth in developed world would be a muddle through but not a sharp fall off. Emerging markets would grow at 1 per cent or 2 per cent lower than CY10 and margin pressure would be evident across companies.
Indian markets have been weak so far in 2011 as overseas investors have withdrawn funds. Do you see a further downside?
The reason why India has underperformed is because of the macro headwinds in light of high inflation, fiscal and current account deficit.
The base case remains that after monsoons, the inflation peaks in Q3 CY11 and the government is able to rekindle positive investment climate through faster project clearances, resolving fuel supply bottlenecks and permitting FDI (Foreign Direct Investment) in retail.
In near-term, the markets would be range bound. However, if fiscal health deteriorates substantially and policy support is found lacking from the government, it may happen that high interest rates impact GDP growth for couple of quarters.
Oil and equities have had a positive correlation in the last two years, but do you see this correlation breaking in 2011?
It is very likely that this correlation breaks in 2011 as beyond $120 a barrel when the spend on oil exceeds 4 per cent of the nominal GDP, demand destruction is known to take place.
Commodities such as crude oil have seen the unwinding of some speculative positions. What is your view on crude oil?
Easy liquidity along with tight supplies after Libya’s fall in oil output is responsible for the current high crude oil prices. The 10 per cent correction in crude price was due to unwinding of speculative positions in light of soft economic data. We believe higher levels of oil would lead to demand destruction over the medium term.
Where do you see precious metals like gold and silver heading?
Despite some pullbacks in the near term, precious metals over two-three years may remain firm as world grapples with uncertainty of resolution of European debt crises and fiscal consolidation in the US.
As the QE2 ends, do you expect unwinding of dollar carry trade? And, where is the dollar headed?
It is unlikely unless US employment remains firm for couple of quarters, than US Federal Reserve would raise rates. In the extreme case of a sharp fall in economic data, we may see another form of liquidity easing.
The best case from a dollar perspective remains that during these times of easy liquidity, US government comes with a credible time bound fiscal consolidation plan.
The Reserve Bank of India (RBI) has raised rates eight times last year. Do you expect a further increase?
A 25 basis point (bps) rise in next meeting in July is likely. Beyond that, the central bank may adopt a wait and watch attitude as transmission of monetary policy happens with a three-six month lag.
Moreover, the last 50 bps rise has been able to rein in inflationary expectations in the economy. Demand is softening and companies are reluctant to pass on the entire raw material rise. A good monsoon and soft global economic data would mean that inflation peaks over the next six months.
How have you shuffled positions in the portfolio, given the Indian market environment and as the earnings season comes to an end?
In the current quarterly season, results have been a mixed bag. Information technology (IT), private sector banks, pharmaceuticals and consumer durables have met expectations. Public sector banks have suffered from high wage and NPA quality provisions, while autos have seen margin pressure despite strong demand. We continue to believe IT, pharmaceuticals and consumer durables sectors would outperform in the near term. But, we would be looking to add financials, industrials and autos on declines from a medium-term perspective.
