 "Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies")
With the frontline indices ruling near all-time high, ANDREW HOLLAND, chief executive officer of Avendus Capital Alternate Strategies, shares his concerns about the markets from a short-term perspective. The ‘buy on dips’ strategy of domestic investors will be tested on a serious market correction, he tells Puneet Wadhwa. Edited excerpts:
What is your market outlook for Samvat 2074?
I am concerned from a short-term perspective. If I think about the monetary policy tightening by the US Federal Reserve, given the recent inflation data, a rate hike is possible in December. Besides, there is balance sheet tightening in the works. Given this, I wonder if there can be some form of bond market turmoil globally. If that happens, there could be a lot of money flowing out of the emerging market bonds, including India. This may depreciate the currency (rupee) and can cause a global sell-off in the equity markets. For the time being, liquidity is the king.
So what are the best and the worst we can see at the index level (Nifty50) over the next one year?
Though I am bullish over the long-term prospects, there are concerns in the short term. If I am right about the bond market turmoil, it could move the Nifty50 index much lower than in the previous corrections. The best-case scenario in the backdrop of a 10 per cent growth in earnings is around 11,000-level on the Nifty50 by this time next year.
Why aren’t we seeing any sell calls on the Indian markets despite the sharp run up and without a meaningful recovery in corporate earnings?
Why aren’t we seeing any sell calls on the Indian markets despite the sharp run up and without a meaningful recovery in corporate earnings?
It’s purely driven by liquidity in a hope that earnings will finally catch up with valuations. Indeed, whilst earnings growth keep getting pushed out by a quarter, the consensus view is that we are near to the bottom and most forecasts are for earnings per share (EPS) growth of 20 per cent for FY18/FY19; hence the optimism.
Will the Indian equity market be able to attract flows — domestic and foreign — at the same pace as seen last year?
I doubt regarding foreign flows. Our long-term view is that the global economic recovery will take place and the emerging markets (EMs), especially the export-driven ones that are cheap on valuations (such as South Korea, Brazil, etc), will do well compared to India, which is domestic-driven. I think the ‘buy on dips’ strategy of domestic investors will only be tested on a serious market correction. At the moment, the consensus view is that there are not much investment alternatives available for people to invest other than the Indian stock market.
Will the next one year belong to the mid- and small-cap segments?
Investors should become more selective on mid-caps now. The stock selection will not be as easy as it has been till now. A lot will depend on the fund flows as well. Though mid- and small-caps will do well in a rising market, one must now remain cautious as they can fall sharply in case of a market correction.
Are the markets prepared for a further delay in corporate earnings recovery?
We have been pushing back the earnings for four years now. I think the corporate earnings will start recovering from FY18. One can expect the earnings to grow 10-15 per cent, but I will still remain conservative and peg the growth at around 10 per cent. That will set the stage for EPS (earnings per share) to grow at 15-20 per cent in the following year (FY19).
What about the banking sector in light of Axis Bank’s earnings?
Axis has highlighted the continuing woes for the banking sector. Every time we think that the non-performing asset (NPA) problem is nearing an end, it gets bigger. I don’t think the finance ministry or the Reserve Bank of India can really tackle the problem in a short span. These will remain for some more time as far as the public sector banks are concerned. I like the private banking space better, albeit selectively. That said, if the power sector remains in the doldrums, there is a lot more provisioning that will have to be done by the lenders.
In terms of sectors and stocks, which ones are on your top buy and sell lists? Why? Any contrarian pick(s)?
We selectively like banks, autos and fast moving consumer goods. We also like housing finance companies, but are not chasing them actively. We had been negative on information technology and pharmaceuticals.
While we are not saying that anything has changed fundamentally for these two sectors, given our view on a stronger dollar and a weaker rupee, tactically we are now less negative on the two sectors.
Do you think the government will compromise on the fiscal deficit target in the next Budget to prop up growth? How are the markets likely to react to this?
That depends on the quantum of slippage in the fiscal deficit target. If it’s just 50 basis points (bps), I don’t think the markets will worry much.
One needs to get the economy moving. The main problem is that there is no private capex (capital expenditure) coming through as yet. It is only the government that’s spending. There are problems with the power and steel sectors, which in turn impact the banking sector. Unless we fix those, the economy will take time to recover.
How do you view the recent macro-economic data? How much room does the RBI have to cut rates?
I think the RBI should have cut rates in the last policy review and don’t know what they are waiting for. The central bank should look at cutting rates now as inflation is falling and most people I talk to suggest the growth / economic activity at the ground level is not picking up. My concern is that if there is some bond market turmoil and the rupee comes under pressure that the RBI may not be in a position to reduce rates then.
