Era of easy money coming to an end: Rahul Chadha, Mirae Asset Global Investments
"Debt and equity markets would correct, but as investors get confidence that we have got a slow recovery coming in equities, a part of this money would again come back to equities. "
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In an interview with ET Now, Rahul Chadha, Sr Portfolio Manager, Mirae Asset Global Investments, shares his views on the market post the FOMC meeting. Excerpts:
ET Now: Depending on whom you are asking I guess you will get a different answer on how one should read into the FOMC meeting, but the bottom line here is that the era of easy money seems to be coming to an end.
Rahul Chadha: Yes, you are right when you make the statement that the era of easy money and huge leveraging is coming to an end, which is why we will see the correction first. Again both debt and equity markets would correct, but as investors get confidence that we have got a slow recovery coming in equities, a part of this money would again come back to equities. So our base view is that first you will see correction because there were lots of excesses because of this easy money being build in the economy and after these excesses as the dust settles down, people would look at the medium-term stories and then accordingly position themselves in the sectors in the countries which look attractive from three to four years’ perspective.
ET Now: What happens then in a case where India is involved because we are looking pretty vulnerable ourselves? The macro picture is looking bleak at this point in time, you are seeing the rupee getting hammered, thanks to the dollar strength as well. Do you think flows after this knee-jerk reaction that we are currently seeing are going to return to emerging markets, especially like India?
Rahul Chadha: For India, the critical thing is the trade deficit, something which we maintain for the last 12 to 15 months. RBI’s rate action is going to be contingent on what we see on the trade deficit. The last thing a central bank can afford is a currency crisis. So if we see this trade deficit which should with a slowing economy go to a manageable number of $12 billion to $13 billion a month from a $18 billion to $20 billion which we have seen for the last two months, the currency markets would stabilise and with inflation also coming down, the outlook for India is lot more better than other economies in the region. Let us understand China is going through its own set of problems where the readjustment is happening in the economy, commodities are out of the bull market. So clearly the macro indicators are good for India. What we need is trade deficit to stabilise, the government to do the necessary things so that people get confidence on the growth in the Indian economy and investors would then take a longer term view on the economy.
Rahul Chadha: I do not really think so. Again, it is really a question of who is better than this ugly contest. Each of the countries, each of the region has its own set of issues. Despite so much talk on the US, what we are looking is only between a 2.2% and 2.5% GDP growth number for the US for this year and that number has been downgraded from 3%. So if you look at the US first quarter GDP data also, you have had sequester having its own impact on the GDP and valuations there are not really cheap. So as people realise that 2-2.5% GDP is what one gets in the US and emerging markets look attractive, again the governments in emerging markets are not letting this crisis go in the much necessarily reforms. At the end of the day, it would all come back to demographics longer-term story. There are enough people in the world who are willing to taka a three-year view on the markets. There is enough money which is on the sidelines which will take the dips to enter the markets. So I am not that bearish obviously and would use any significant dips to add to the stocks we like.
ET Now: Depending on whom you are asking I guess you will get a different answer on how one should read into the FOMC meeting, but the bottom line here is that the era of easy money seems to be coming to an end.
Rahul Chadha: Yes, you are right when you make the statement that the era of easy money and huge leveraging is coming to an end, which is why we will see the correction first. Again both debt and equity markets would correct, but as investors get confidence that we have got a slow recovery coming in equities, a part of this money would again come back to equities. So our base view is that first you will see correction because there were lots of excesses because of this easy money being build in the economy and after these excesses as the dust settles down, people would look at the medium-term stories and then accordingly position themselves in the sectors in the countries which look attractive from three to four years’ perspective.
ET Now: What happens then in a case where India is involved because we are looking pretty vulnerable ourselves? The macro picture is looking bleak at this point in time, you are seeing the rupee getting hammered, thanks to the dollar strength as well. Do you think flows after this knee-jerk reaction that we are currently seeing are going to return to emerging markets, especially like India?
Rahul Chadha: For India, the critical thing is the trade deficit, something which we maintain for the last 12 to 15 months. RBI’s rate action is going to be contingent on what we see on the trade deficit. The last thing a central bank can afford is a currency crisis. So if we see this trade deficit which should with a slowing economy go to a manageable number of $12 billion to $13 billion a month from a $18 billion to $20 billion which we have seen for the last two months, the currency markets would stabilise and with inflation also coming down, the outlook for India is lot more better than other economies in the region. Let us understand China is going through its own set of problems where the readjustment is happening in the economy, commodities are out of the bull market. So clearly the macro indicators are good for India. What we need is trade deficit to stabilise, the government to do the necessary things so that people get confidence on the growth in the Indian economy and investors would then take a longer term view on the economy.
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ET Now: I am with you when you say that on a relative basis, India clearly is the cleanest shirt in the basket of dirty laundry, but the big reason why emerging market equities have done well is because the US economy was slowing down, the US economy was in pain but now that everyone is optimistic that the US economy will revive or has revived. Will that challenge the basic thesis for emerging markets?Rahul Chadha: I do not really think so. Again, it is really a question of who is better than this ugly contest. Each of the countries, each of the region has its own set of issues. Despite so much talk on the US, what we are looking is only between a 2.2% and 2.5% GDP growth number for the US for this year and that number has been downgraded from 3%. So if you look at the US first quarter GDP data also, you have had sequester having its own impact on the GDP and valuations there are not really cheap. So as people realise that 2-2.5% GDP is what one gets in the US and emerging markets look attractive, again the governments in emerging markets are not letting this crisis go in the much necessarily reforms. At the end of the day, it would all come back to demographics longer-term story. There are enough people in the world who are willing to taka a three-year view on the markets. There is enough money which is on the sidelines which will take the dips to enter the markets. So I am not that bearish obviously and would use any significant dips to add to the stocks we like.
ET Now: So what is it that you like when it comes to Indian equities?
Rahul Chadha: We have been overweight exporters for some time. Some of it, like pharmaceuticals names have worked, while IT has been impacted because of this immigration bill. Outside that we like private banks, but again in the near term they may be under pressure because of slowing economy, but if we take a three-year view, that looks attractive. Consumer discretionary is the other space we like. We believe that as rate cuts happen in the economy over the next 12 to 15 months, we should see demand revival happening in the economy. Finally telecom is one sector we have liked for sometime because we believe competition is clearly ebbing over there. We can see improvement in the EBITDA per minute for most of these companies and the sector is going to rerate in line with the regional peers.
ET Now: Historically we have seen that equity markets and currency markets they always move in a synchronised manner. Rupee has plunged to a fresh low against the dollar and the fact that US economy has recovered will only strengthen the case for a stronger dollar. So do you think in the near term we could be staring at a weak rupee and if that is the case, the upside could be getting capped?
Rahul Chadha: Markets remain fairly range-bound in the near term, like we have said from a three-year perspective India is an attractive story because we are more at the trough as against some of our regional ASEAN economies which are more at a near-term peak in terms of GDP earnings momentum. That is why the downside would not be more than, let us say, 5% to 7%. The upside would be capped more largely in the form of election uncertainty because people want clarity on the government. The government is acting, but it is coming too late for things to have an impact. Had they done this two years back, we could have seen corporates responding with investment in the economy. Right now all these measures are happening, but we are yet to see follow through from the corporates because everybody is scared of the election uncertainty. So we will get a momentum pick up in India post elections, which is why the markets would be sideways till elections. Outside that the rupee clearly has depreciated a bit more vis-à-vis the regional peers and that is largely on account of trade account. With the slowing economy our belief is that this trade account should get corrected over the next three to six months and we should be pretty much in this range for the rupee.
ET Now: What do you make of the recent bout of selling by foreign investors? For the first time in many months we are staring at a data where foreigners have not only stopped buying, but they have started selling. Does the recent pull out in equities bother you?
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Rahul Chadha: Not really. See the kind of inflows we have got over the last 15 to 18 months, we were first very surprised by the nature of the inflow figure. So what has gone out is just a drop in the ocean. Clearly what one needs to see is the follow up response from the government. With this movement of rupee, things should get a lot easier for the government to push through the necessary reforms. We are positive on what we have seen on the oil price reforms. We need more of FDI to come into the country. See we can get a 6% to 7% GDP growth rate only when the FDI goes to $40 to $50 billion, else every time we hit a 6% GDP, we will have a trade deficit staring at us. So clearly we need the government to kick start investment in the economy, get more longer-term investment from a structural rerating and then only the markets would sustain at high valuations. Download
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