With the strong mandate for the Narendra Modi-led National Democratic Alliance (NDA), all eyes are now on how the new government tackles key economy and policy issues. Andrew Holland, chief executive officer, Ambit Investment Advisors, tells Puneet Wadhwa the Indian markets are at the beginning of a multi–year bull run and the economy has the potential to grow rapidly over the next few years. Edited excerpts: What does the road ahead for the markets look like now? We had said in October 2013 that a new bull market would begin in 2014. Now, with the Narendra Modi-led Bharatiya Janata Party/NDA securing a clear mandate, this confirms our bullish view. I expect a bull market similar to 2003-2006. I am leaving 2007, since it was a peak of everything (in terms of asset classes). We are expecting annual GDP (gross domestic product) growth in the range of 5.5-7 per cent. In October 2013, we had said we wanted to move towards cyclical sectors such as industrials, utilities, metals and automobile components and that’s playing out very nicely for us. Going ahead, these are the sectors where one would see a huge earnings growth, as the operational gearing in these sectors is significant. I am not of the view that we will get a P/E (price-earnings) expansion. A lot of people are saying the markets are going to move higher. I don’t think that will be the case, at least in the short term. Is there a case for de-rating for some sectors? I think some sectors will be de-rated, like consumers, pharmaceuticals and even information technology (IT). And, these are big heavyweights. So, the index, in the short term might struggle to push higher. Earnings will trail for some time till the operational gearing plays out. We are not looking that much at the index because that’s not where I will make money. It will be the broader market where we will make strong returns.
Do you think that in the immediate term, say over the next three months, the markets could remain range-bound? Yes, there is a possibility that the index remains range-bound between 7,500 and 7,600 levels for some time. There are a lot of events lined up like the formation of the government, Union Budget, etc. These are events the markets will be keeping a tab on. I feel what Modi does will keep us all and the markets happy; they’re at the start of a multi-year bull run.
A lot of analysts / market participants believe that Indian markets are at the beginning of a multi - year bull-run. Do you agree? Yes, I agree there the markets are at the start of a multi-year bull run.Do you think even a slightest disappointment on the reform/policy front could now trigger a sharp correction? How sharp can it be? I am not looking for that. However, a lot would depend on what policies one is expecting from the new government. My expectations have always been that all the projects hanging in balance will be implemented and there will be a pick–up in the economy. Some of the low-hanging fruits here are the goods & services tax, foreign direct investment (FDI) in insurance, etc. A faster approval and implementation will keep the momentum going. On the other hand, issues like labour laws for manufacturing will take time before they are implemented. No one expects a change in labour laws overnight.
What are the key factors that will drive the next leg of rally and by when? Which sectors and stocks will drive it? Like I said earlier, in October 2013 we wanted to shift away from defensives to industrials, automobile components, utilities, materials, etc.
These themes are likely to do well going ahead, too. As of now, I am thinking about a new India and how to invest.How does India now stand relative to the other emerging markets (EMs) in terms of the road ahead for the economy and what the markets may derive from this? Do valuations justify the premium? India is head and shoulders above everyone else among the EMs. China, Brazil, Russia and other EMs do not have this moment in time as India. For India, the time is now. So, I’m quite bullish in that respect as regards India. If you leave out IT, pharmaceuticals and consumer sectors, the broader market still trades at a P/E of around 11x. And, that’s what we’re buying right now. I’m not buying the index but I’m buying the broader markets.
The mid-and small-cap indices have been on a roll since the past few sessions. How much headroom do they have left now? Would you go with high beta names here as well? I'm not saying high beta, but I'm looking at high operational gearing. Whatever be the P/E multiple now, I feel that it will be significantly lower in the next two years. I expect a lot of earnings upgrades over the next two years.
Are the markets factoring an improvement in earnings right now? I don’t think so. I think they are still trying to gauge the moment. By not doing too much, the Indian economy has the potential to grow rapidly over the next few years.
What does it mean for the rupee? Where do you see it by December 2014-end? I don’t think it will be too far away from the current levels. It can be a bit stronger. FDI flows or foreign institutional flows will likely pick up. If (Narendra) Modi can put a road map for global companies to come to India, they won’t invest heavily straight away, unless they buy out their own subsidiaries – which I’m not saying they will do. It will take at least six months for more FDI to come into India. Hence, the rupee will remain stable around 56-57 levels by December.How soon, then, do you expect a reversal in the Reserve Bank of India’s (RBI’s) stance on key rates? I think if RBI continues to tackle inflation, things will remain under control. I believe financial gearing is next year’s story. It seems inflation is under control but there are certain factors like El Niño that could spoil the party. On the other hand, one doesn’t actually need the interest rates to come down. If we talk to any company, especially now, they don’t feel there is a need for rates to come down as they see earnings growth kicking in for them.
The Union Budget will probably be the first formal platform when the new government is likely to announce the roadmap of what it plans to do. What are your expectations? I am looking for a direction from the government as to what they want to prioritize going ahead. A fiscally responsible budget would be fine, and that's what the markets would also like.