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We hope Budget is not too populist: Andrew Holland

Interview with CEO (Investment Advisory), Ambit Capital

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In a conversation with Puneet Wadhwa, , CEO (Investment Advisory), , talks about the challenges ahead for the global markets, with special focus on India. Edited excerpts:

How do you assess the prevailing global macroeconomic situation?
The situation has not markedly improved since the beginning of the year. While liquidity always helps take ones eyes off the fundamentals, be assured we will return to fundamentals.

What about India?
The one big negative investors are choosing to ignore is the rising price of oil, which in the past, has pulled down growth for developed markets, as any extra consumer disposable income is eaten away by higher petrol prices.

Thus, the same optimism we witnessed in early 2011 with respect to developed economies (i.e. the US) showing strong recovery, may well be dashed. In India, higher oil prices will inevitably be a headache for the Reserve Bank of India (). Also, the recent optimism that interest rates may come down (slash interest rates) much quickly may prove premature.

The other negative side-effect of liquidity has been the rise in commodity prices. Again, for India, this will either lead to higher product prices (inflationary) or companies taking a hit on margins. This may lead to further earnings’ downgrades and cap the valuation upside in the short-term.

Is there more pain in store for the markets as far as the situation in Greece and Iran is concerned?
The Greek situation has now been (hopefully) resolved. However, hard work is still needed in terms of austerity. Focus will now turn to Ireland, Portugal and Spain and how they implement their austerity programmes.

For sure, the new mantra for the euro zone has to be growth and we believe investors will start focusing on this. If the US experience is anything to go by, “money doesn’t necessarily buy you growth”.

So, it will be how business views the recent moves by the finance leaders of Europe and, more importantly, if they have confidence in the euro leaders to believe “growth” will happen. The next quarter will be critical from this standpoint.

The liquidity gush has seen most equity markets, especially India, do well in 2012. Have we run up ahead of fundamentals? How do we compare with other emerging market peers in terms of valuations?
Around $4 billion of foreign institutional funds have flowed into India (year-to-date) and the market is now looking fairly valued, both to its own historic price-to-earnings ratios and to other emerging markets.

This liquidity rush has, without doubt, changed India Inc’s body language to a more positive outlook and the government is playing its role by focusing on the problems in the power sector. Throw in the expectations of a stronger government after the local elections and the RBI reducing interest rates, and it could be argued that the fundamentals for India are rapidly ticking higher.

We are cautiously optimistic and feel there are still headwinds out there that could quickly turn the sentiment around. We feel, in the short-term the market has probably run ahead of itself.

How are you positioning your clients from this level onwards? Any stock/sector/theme where you still find value from a medium-term perspective?
Over the next one year, we are positive on interest rate-sensitive sectors though we would wait for any pullback before adding to portfolios. Media is of particular interest and we remain bullish that the structural changes taking place in the sector will lead to growth as well as mergers and acquisitions as consolidation takes hold.

We would not be chasing the infrastructure and power sectors until greater clarity emerges from the government. This may be a conservative view but given how difficult it would be to fix all the problems at one go, the market may be disappointed.

What are your expectations from the Union Budget 2012?
We hope it is not too populist as fiscal deficit remains a huge concern for foreign investors. A more balanced outcome towards fiscal restraint would be a welcome move.

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