Earnings downgrades widespread and more expected, says Andrew Holland

Holland says that flows - especially passive - will favour the US and developed markets over emerging markets

Tepid earnings growth in the September 2024-25 quarter, amid sticky inflation, withdrawals by foreign investors, and global headwinds, has diminished the appeal of Indian markets. Andrew Holland, chief executive officer at Avendus Capital Public Markets Alternate Strategies, tells Puneet Wadhwa in a telephonic conversation that flows — especially passive — will favour the US and developed markets over emerging markets (EMs). Edited excerpts:

 

It has been a slow grind for the markets, continuing their downward spiral. Do you expect this tepid mood to carry into 2025 as well?

 

With foreign portfolio investors (FPIs) typically winding down in December, we may see domestic investors taking the lead and helping markets bounce from recent lows. That said, with the volatility expected around President-elect Donald Trump’s administration taking office on January 20, 2025, the bounce may be short-lived.

 

Does that mean more foreign outflows ahead?

 

We firmly believe that flows — especially passive — will favour the US and developed markets over EMs until a clearer picture emerges in 2025. For India, while the narrative of a Trump win will be neutral to positive, it mainly relates to China.

 

The China+1 strategy will undoubtedly continue to favour India from an FDI perspective. However, from an FPI standpoint, the high valuations of the markets, coupled with earnings under severe pressure, lead us to believe that foreign outflows may not abate quickly.

 

So, is it better to stay in cash for the next few months?

 

For India, the re-election of President Trump is widely seen as neutral or positive, particularly concerning the China+1 narrative. The risk lies in further China stimulus, which could overshadow India and impact foreign investment flows. It’s a tricky few months ahead, and as such, we maintain a cautious view of the markets. Cash as a strategy is, therefore, an option until President-elect Trump takes office and clarity on policies starts to emerge.

 

How comfortable are you with the overall market valuations at this stage? Are there any sectors where valuations appear attractive?

 

Earnings downgrades are widespread, and more are likely to come. Across the board, revenues are showing little growth, while more importantly, profit margins are falling. Given the slowing economy, this trend will likely continue. Earnings forecasts will likely face another round of downgrades as we approach the end of the calendar year.

 

While we expect an interest rate cut by the Reserve Bank of India (RBI) in December, recent statements by the RBI Governor have indicated risks to reducing rates at this time. Unless there’s a massive pick-up in government spending or private capital expenditure, markets — at best — may tread water until either earnings support valuations or vice versa.

 

Do you expect inflation to remain elevated as trade wars take centre stage?

 

For EMs and the rest of the world, the key is the level of import tariffs imposed once the new administration takes power. As things stand, the proposed tariffs for China are 60 per cent, and for other regions, they range from 10-20 per cent. This would lead to higher inflation, slower global growth, and, in the short term, a stronger dollar. Whether countries will react with counter-tariffs will need to be monitored, but our initial take is that countries impacted will likely let their currencies depreciate, and trade wars could accelerate.

 

Will higher inflation translate into less consumption? Which sectors are at risk?

 

The economy is slowing, which will continue to hit consumer spending. The automotive sector, in particular, may face headwinds.

 

What’s your reading of the global situation — geopolitics, developments with the US, China, and Japan?

 

Trump’s return as the 47th President of the US, along with a ‘Red Sweep’ of the Senate and Congress, has led to a huge risk-on sentiment, with the focal point being US equities, the US dollar, and cryptocurrency. This will likely continue, and in our view, the likely policies of a Trump administration do not bode well for EMs, and as a result, equity flows.

 

The good news for the US is that the ‘Goldilocks’ soft landing scenario will be aided by policies to: (i) lower corporate taxes, thus boosting earnings; (ii) reduce personal taxes; (iii) deregulate to aid M&As; (iv) raise import tariffs; and (v) focus more on domestic manufacturing, supporting the “America First” narrative.

 

On the flip side, these policies could lead to higher inflation, fiscal deficits, and bond yields, with the Federal Reserve (Fed) becoming less likely to aggressively cut interest rates.

 

Some experts see the Fed pausing rate cuts. What’s your view?

 

In the US Fed’s November monetary policy meeting, interest rates were lowered by 25 basis points, with the committee open to a possible cut in December. However, if economic and jobs data remain strong, the possibility of a ‘pause’ may not be ruled out.   

GLOBAL POWER AXIS Trump, China, and market trends

Trump’s return drives risk-on rally: US equities, dollar, and cryptocurrency rise

Emerging markets face challenges; equity flows at risk 

 US benefits from a   ‘Goldilocks’ scenario 

Corporate tax cuts support earnings growth

Deregulation accelerates M&As

Tariffs and domestic focus strengthen ‘America First’