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    During fiscal expansion, cutting rates aggressively will be adding fuel to fire: Krishna Memani, Oppenheimer Funds

    Synopsis

    "Corporate governance and leverage have been perennial issues in Indian corporate sector"

    The rural-focused interim budget should help the Bharatiya Janata Party in the general elections but this comes at the expense of fiscal discipline, says Krishna Memani, chief investment officer at Oppenheimer Funds, which had more than $226 billion in assets under management as of January 31. Valuations in India are probably the worst of any large emerging market, because of which other markets look more attractive, Memani tells Sanam Mirchandani in an interview.

    Edited excerpts:

    Do you think the interim budget will boost BJP’s prospects in the general elections?

    The budget was an election budget with the goal of finding ways to garner rural votes for the BJP. We believe they largely succeeded in that effort and therefore this should help them in the elections. This, however, comes at the expense of fiscal discipline and potentially rising funding costs. There is nothing in this budget that should please a fixed income investor.

    Do you see RBI cutting rates further?

    Inflation continues to come down on a global basis and provides the cover for RBI to cut rates. However, in a period of fiscal expansion, cutting rates too aggressively will be adding fuel to the fire. That will lead to a higher price to be paid through inflation down the road. RBI better be very careful on this front.

    Corporate governance and high leverage have emerged as key concerns in several Indian companies recently. What are your thoughts?

    Corporate governance and leverage have been perennial issues in the Indian corporate sector and is nothing new. That said, there is a large swatch of world-class companies in India on this front. Therefore, we spend a great deal of time to understand the ownership structure, governance policies and funding mechanisms before we buy any Indian company.

    What is your view on the emerging markets?

    The combination of the Federal Reserve getting off of their misguided rates tightening path and a trade settlement bodes really well for emerging markets. Another reason why emerging markets are going to do better in our view in 2019 is because valuations in emerging markets, with probably the exception of India, especially places like China are extraordinarily attractive. A combination of Fed backing off, dollar not strengthening, trade deal and attractive valuations, we think makes for a good outcome for the emerging markets.

    How do you view India within the EM space?

    From a valuation standpoint, the challenge India has is that markets have been relatively stable despite the fact that earnings growth has actually slowed down. The economic momentum in India is good. However, because of all the things that have happened over the last three-four years, valuations in India are probably the worst of any large emerging market. So, it is not that there is anything wrong. It is just that because of those higher level of valuations, other places are far more attractive. The key point with respect to that it is not saying that India underperforms, it is just that other emerging markets probably do better because they probably will see more flows than India from foreign investors.

    Do you see the US and China reaching a settlement in trade talks?

    While our expectation was that the Trump administration has some incentive to reach some sort of a trade settlement ahead of the mid-term elections, that didn’t pan out and that had very negative repercussions for the markets. The outlook for 2019, we believe, is materially better and the reason it is materially better is because both economies — US and China — in 2019 are slowing down. The drop in Chinese economic momentum in the fourth quarter was actually much worse than what anybody was expecting. Everything is lining up, not because things are looking better on the economic front but because things are looking so much worse on the economic front, it gives everybody an incentive to reach some sort of a settlement.

    What is your view on the Indian IT space? Are you still bullish?

    We think of companies rather than sectors or countries. That sector has had good performance of late. Slowdown in the US and the weakness of the dollar clearly will weigh on that sector. One thing to be mindful of is if the Trump administration comes up with a policy path with respect to H-1B visa, providing a path to citizenship, that may end up being a very positive outcome for Indian IT companies. The importance of that should not be ignored.
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    1 Comment on this Story

    rhp588 days ago
    Already Government has dozed the fire of NPAs of bank, insolvent assets of companies like Essar steel , Bhushan Cement, etc are salvaged, Attached assets of fugitives. Now celebrate by giving MSP and Rs.6000 to the small farmers. After all, our food is given by them at the cheapest cost in the world. The author also need to celebrate this movement
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