Outside Reliance, not many proxies for Covid beneficiaries in India: Rahul Chadha

As people get the comfort of the recovery getting broad based, money is going to move out of Hong Kong, China and go to other markets where risk reward is a lot more favourable, says the CIO, Mirae Asset Global Investment.
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Do you think after a splendid June and July, August is going to be a good one? Are the gains that we have seen here to stay?
We may see some pullback because the markets are also debating how the fund raising for key banks is going to go through. If we see a favourable outcome on these fund raisings -- whether it is HDFC, Axis or ICICI -- that is going to be a positive trigger for the market. More importantly, what markets are watching is data for July and August. In June, there was a pent-up demand and that is why data was good. We have to see if this data holds on in July and August. The base case is it is going to be lower than June but not significantly. That will be reassuring for the markets.

What is positive is the global backdrop. The global backdrop of a weaker dollar, strong stimulus by governments in the euro zone and the US is positive for global equities. Clearly a change in leadership is on the cards. In the last five-seven years, we have seen money flocking to the US. That money is likely to move out to EMs in coming years as we see more and more signs of inflation coming through. Dollar weakness, inflation coming back, the reflation trade coming through is more of a medium term trend. From the next one or two months perspective, the data points for July, August and the fund raising for the leading banks is going to be the key thing to watch out for from the market’s perspective.

The US markets are largely dominated by tech giants. Don't you think there is a bubble there?
Of course there is a part of the market which is frothy. We have been debating all the time that there are Covid beneficiaries. All these names which have benefitted from Covid are in a different world. Those names remind us of the tech bubble valuations in 2000. Those names remind us of the infra bubble in 2007-2008. So that is the bubble part of the market that is getting built because the US 10-year treasury bond yield is going down. But the economic data is holding on and that was our base case from the US.

In the US, over the last one month, the number of infected people have increased but the eastern part of the US where a large part of the economy comes from -- New York, etc -- is recovering well. Most of the US is also going through the humps and the western part is also stabilised. If the economic data stabilises, then the market would give away this utterly pessimistic kind of situation or hypothesis and look at other stocks also. The Covid loses where there is deep value.

Banks may do a great job of raising capital but by raising capital in the short term, the return ratios are diluted. What is your view on banks?
For last three months, there has been a fair bit of uncertainty over banks because banks are a proxy for the economy and that is what markets will get comfort from. Though the GST collection has come down, it is still not down significantly. The e-way bills are reasonably decent. Maruti’s July month sales are some points of comfort. But you need more comfort for banks to perform from here.

Investors are genuinely confused about the moratorium numbers and flexi loans which the banks or the financial institutions are giving. That is why the interest would be confined for the moment to the top three or four banks. Over the next three to six months, as people realise that the economic data is stabilising, we get some visibility on the phase three trials of these vaccines and in six months stock up two-three hundred million doses up globally, you will see performance from the cyclical part of the market. So from a one-year perspective, banks are clear outperformers but in the next three months, they are going to be volatile.

Rural economy, tractor sales, digital economy, food or some FMCG companies are doing better than pre-Covid days. How do you read the businesses which have become better, stronger and have emerged as clear winners because of the Covid crisis in India?
The economy was coming out of a downturn pre-Covid. If we look at the data around November, December, January and February, things were on the mend. Post Covid, we have seen a bit of government support from NREGA, etc. The rural economy particularly comes on well and that is where autos look interesting.

Even after some bit of growth next year, we will be at the levels we were two-three years back. So autos clearly look interesting. If we look at the pure Covid beneficiaries outside Reliance which because of the Jio and online retail, has some bit of an interactive act, there are not many clear proxies in India. You get better proxies from a regional fund perspective in China, Korea, etc, but in India there are not many listed proxies.

You sit in a part of the world where there is a political tremor. What does that mean for global investors if they are investing in China or markets in that region, will have to deal with two challenges – economic slowdown and political tremors?
So first and foremost obviously what moves the market is the earnings or again the confidence on the earnings recovery and which is where I would say China was a bit ahead or the north Asian region because they handled Covid well. China, Korea and Taiwan were a bit ahead of India and ASEAN in terms of the earnings recovery. That is why these markets have performed well.

What you talked about the political challenges is more from a medium term perspective as markets get the confidence that the recovery in India and parts of ASEAN is a bit more steady. That is where the money would move. We have seen the weight of Hong Kong. China being nearly about 55% in the regional benchmarks, this is MSCI Asia ex-Japan benchmarks, it is exceptionally high weight. As people get the comfort of the recovery getting broad based, money is going to move out of Hong Kong, China and go to other markets where risk reward is a lot more favourable.

Do you still remain bullish on pharma?
There is a lot of good news in pharma in the price of the generic pharmaceutical companies. Those are the India Covid beneficiaries. If you take two, three years out, a lot of good news is in the price. If one has a one year plus timeframe, hospitals are attractive over there and that is part of the overall healthcare space which has not participated in the rally that has underperformed.

These names may not do much from a three or six months’ perspective, but for 12 to 18 months, they offer handsome risk reward. Pharma probably can hold on well for the next three to six months but as cyclical recovery gets more entrenched in the economy, other sectors will also do well.

There are two types of companies; one which generate constant cash flow including IT, some pharma companies, a lot of consumer names; and companies closely linked to the economy like consumer discretionary, cyclical and industrials. Which way would you lean for the next couple of quarters now?
So if we next three or four quarters, among high ROCE, stable cash flow companies, IT is something one would be still comfortable with. Historically, we have not been in this sector because growth rate was slow, the legacy business was constantly under price pressure though digital revenues were growing at 30-40%. But the legacy business was ensuring that the growth rates were in mid to high single digits. As a result of the pandemic and the big digitisation push, globally their growth rates may improve in the coming years and that is going to be a significant trigger for these names. And also, these companies have shown a good ability to manage their SGNA costs.

So in the first pack, IT clearly stands out even at these levels from a risk reward perspective. Outside that, it is really a play on cyclical recovery. Our portfolio is a balance of two and as we get more clarity on recovery, we will tilt more towards the recovery play.

Donald Trump talks about cancellation of visa, how federal government will be contracting contracts to companies which do not take H1-B visa. Are these long term structural changes which are likely to change the way how Indian IT industry is going to do business in the US?
A lot of these leading IT companies have been doing a fair bit of on-shoring. Government contracts to the best of my knowledge, are not more than 5% for most of these large companies, H1-B usage has also been reduced over the years. We have got to get used to a world which is a lot more localised and where you have got a lot of government policy influence. What helps these companies in the near term is that most businesses globally realise that look if you got to stay relevant for the next five to 10 years you need to have an omni channel strategy, a big data analytics framework, a good Cloud framework and that is where a lot of Indian companies should benefit.

Is it a very big challenge now to map a stock like Reliance for a fund manager like you who has to manage risk and cannot go extremely overweight?
You are right. In a regional fund, Reliance has done well because it is a fairly large exposure but for our India country fund, despite having kept Reliance as the biggest holding, when the stock performs it is a detractor and that is a big challenge for us. One wishes for the company to do well, but like you said, it is a challenge for us.

It gets to a situation which we have seen in Korea where Samsung Electronics is close to 20-24% of the Korean benchmarks and the country’s fortunes are very much linked to one stock. It is not a healthy situation from a long-term perspective and you need more good companies to counter.

Do you think insurance companies are expensive or do they have a long way to go?
They have done well from the lows. They have outperformed the banks and are going to go through a period of time correction. For anybody with a three to five-year timeframe, these are good compounders and we continue to maintain our weights there. We continue to like the space but they may take a breather having done so well from the March lows.