RBI to focus on inflation for next 1 yr: Mirae Asset Mgmt
RBI’s monetary policy announcement today is going to be a determining factor for the market. Rahul Chadha of Mirae Asset Management expects a 25 basis points (bps) hike because of high inflation levels. “Due to depreciation in the rupee, hikes in electricity tariffs by state electricity boards (SEBs) and commodity prices, inflation is proving to be far stickier” he said exclusively to CNBC-TV18. Over the next one year, RBI may choose to sacrifice growth to control inflation, he adds.
Globally, Chadha is wary of the news coming in from Europe. “European sovereign debt crisis is the single most important channel which is facing the markets now. Due to this, risk aversion is at its highest: he said. However, he believes that a positive policy action can squeeze short covering.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee.
Q: From a market perspective, what are your expectations from the central bank today?
A: I think there is a high probability that we may see a 25 bps hike. Inflation is running much higher than the comfort level of policy makers; depreciation in the rupee and hikes in electricity tariffs by SEBs have also added to it. The commodity correction which was expected because of all these global slowdown and worries hasn't really happened, so inflation is proving to be far stickier. I think the central bank may choose to sacrifice growth over next one year to put inflation under control.
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Q: Globally negative news flow has been basically emanating from Europe. What have you made of the kind of information we have been getting from there?
A: I think things look extremely tough in Europe. Clearly the key worries are on sovereign debt and finding a key solution for this. Some proposals have come on euro zone bonds, but we need to see more clarity on that over next couple of weeks. But clearly, I think European sovereign debt crisis is the single most important challenge which is facing the markets now.
Q: How high is risk aversion in terms of how scared people are running?
A: Risk aversion is at its highest, you see that in most investor portfolios. Look at the record number of shorts across major markets, so clearly most investors are defensively positioned. So should there be a positive policy action, we can have a squeeze on short covering.
Q: While most people agree that valuations are quite appealing in many cases, the fear is that we’ll probably at some point see a 2008 kind of capitulation and that will give a much better buying opportunity. Do you see that possibility this time around?
A: I think the difference from 2008 is that policy makers have learnt from the mistakes; we had a collapse of the system and the financial conditions came into a complete halt. Here, they are fairly cognizant of that and they are trying their best.
What happened in 2008 was that we pushed the problem back couple of years and that problem has actually come to haunt us now. I think this is really bigger than what we saw in 2008. The key issue from Europe is that if we do get something like a Eurobond, it will give a temporary reprieve to countries such as Spain and Italy to tide over their near term debt financing or refinancing problems. Even beyond that, the bigger problem comes in 2012 because should these countries resort to the austerity measures which are part of the stabilization program, that would almost guarantee a recession in Europe.
So I clearly think that markets are really worried on whether these countries would choose to take the path of austerity to conform to the strong austerity measures. If they do so, then also they are under pressure because that would really entail contraction in their GDP next year.
Q: The other problem has been the rupee which sank to 48 before pulling back a little bit. How are global investors like you reading the currency movements?
A: The currency has made lot of foreign investors worried. Any which way India was running a monthly deficit of about USD 40 billion which was excessive, so that was getting financed by the capital flows. But this month we saw most of the regional currencies depreciate by about 3-4%. I think rupee over the last month and a half has nearly depreciated by nearly 7-8% which is worrisome. So investors would wait for more clarity on currency before increasing allocations to India at this point of time.
Q: What do you do with a sector like IT? It’s been a huge underperformer this year and currency has helped it keep afloat this week.
A: That sector gets a near term reprieve through rupee depreciation. But we are underweight on the sector which gets nearly about 40% of its revenues from BFSI, which is where the whole problem is. Also, about 60-70% of revenues are from Europe and US and that would be under pressure as projects gets deferred over next couple of months. We are already seeing layoff by big banks and it is just a matter of time when we hear a project deferral or price cuts.
So I think we may not see much changes happening in the revenue growth for these companies, but multiples would contract and I think the current valuations pretty much factor the upside for next one year.
Q: We were just talking about autos and Tata Motors ? What's your sense of how to approach this space now?
A: See our belief is as long as you have got something at 15-17 times for the return on capital (ROC) these companies have, which is around 30-35%, and the penetration levels they have, and the near term demand visibility which is there for next 6-10 months, these stocks should do well in a period of strong global uncertainty.
Outside that, one is not really comfortable buying lets say consumer staples company at 30 times just for the fact that it in defensive. So clearly one is looking at earnings visibility, some bit of assurity in earnings, but at a given price; not willing to pay any valuation for that.
Q: How are you approaching the FONGC PO as it comes about, whenever it does?
A: I think at a valuation say 7-10% lower than the current market price the FPO should generate good interest. Outside that, investors would also look at some kind of good serious commitment from the government to cap subsidies at the 1/3rd ratio for upstream and downstream and government share. Also, some bit on reforms to reduce this burden and pass the oil price shocks to the common public. So I think should those policies be carried out, the FPO would be from a one year perspective a good attractive investment opportunity.