Andrew Holland, CEO (Equities), Ambit Capital says India is one of the worst performing markets globally this year. "It might be flashing green, but stock prices are really not moving," he told CNBC-TV18 in an interview.
Analysts are expecting money to flow out of bonds and into equity. However, Holland is not convinced of the "great rotation" theory. "I have to be convinced a bit more, and certainly after the data coming out of the US and China, that kind of backs up my cautiousness at the moment. I am not sure if this big move from bonds and equities, which we have seen every year in January for the past three or four years, will play out just yet. So a little bit cautious actually," he says.
Weak GDP data and jobless claims from the US, struggling China manufacturing, and even though bond yields in Europe are looking better, there is talk of recession in the UK. The Purchasing Managers' Index (PMI) in Europe may start to slip again. "That would auger well for the bond market because there has been no growth like what people were expecting. That is what I am cautious about and those are the data points I am looking at," Holland says.
For the Indian market, Holland says, a lot of people will focus on what the finance minister says in this year's Union Budget - the last one before the general elections.
The word on the street is that the market is going to run up ahead of the budget. The government might deliver a populist budget and the market may get a follow-through after that. Coupled with the buoyancy in global markets, it might push the Nifty over 6500 before the budget and then 6700 afterwards. "It is horribly consensus and something tells me that I should be a little bit cautious when everyone is saying the same things," Holland warns.
Below is an edited transcript of Andrew Holland's interview on CNBC-TV18
Q: How are you calling the market for February, given the kind of money we still seem to be pulling?
A: We are flashing green and are seeing great inflows, but the market has not done much. It is one of the worst performing markets globally this year. So it might be flashing green, but stock prices are really not moving. I am not convinced on this great rotation trade.
I have to be convinced a bit more and after the data coming out of the US and China, that backs up my cautiousness at the moment. I am not sure if this big move from bonds and equities that we have seen every year in January for the past three or four years will play out just yet, so a little bit cautious.
Q: A lot of people are feeling cautious because it has been a relentless rally and people have started getting a bit complacent in global equities as well. Can you see a trigger ahead which can usher in some risk-off after many months?
A: I can. The GDP data from the US indicates the jobless claims in the manufacturing of the US and China. Even though bond yields in Europe are coming out, you are talking about recession in the UK, the Purchasing Managers' Index (PMI) in Europe starting to slip again, so that would auger well for the bond market because this is not the growth that people were expecting. So, this is what I am cautious about and those are the datas, I am looking at the moment.
Q: Would you say the chances of a pullback in the market are higher than another 5-7 percent extension on the way up?
A: I think for the Indian market we do have a single event which is the budget and I am not usually keen on the budget and the expectations, but this time, there will be a lot of eyes focused on what the Finance Minister does, because it is the last one before the elections. There will be a lot more commentary and a lot more expectations ahead of that.
Everyone is saying that the market is going to run-up ahead of the budget, it is going to be a great budget and we are going to get follow-through after that and because of the global markets helping that will push the market to, say Nifty over 6500 before the budget and then 6700 afterwards. It is horribly consensus and something tells me that I should be a little bit cautious when everyone is saying the same thing.
Q: What do you expect to see from New Delhi over the next four weeks? The finance minister has been talking about a lot of things that he expects to deliver in the Budget like fiscal deficit targets. Do you think a large part of the Budget good news could come through the month of February?
A: I was in Singapore when he (finance minister) was there. He delivered a very articulate presentation of how he is going to push the reforms through and tackle the fiscal deficit. You are left thinking what he has left out or what more do I need to know. On the side lines, there is going to be a lot more and that is why expectations for the Budget remain very high, big things have to happen on land acquisition.
We have to get the GST going through as these are big game changers. What is not in the Budget, the Prime Minister has to get the coal linkage, that whole power sector sorted out because that is a huge mess at the moment. Some of us see some traction on this. We remain in that difficult situation where exports are not picking up, imports remain quite high and that current account deficit worries me.
If you get a risk-off trade coming in the global markets and you see FII selling, how that would have impacted the currency in the very short term because I don't think there is anything to hold it strong apart from the FII flows at the moment, so those are the concerns. Whilst I am hoping that he will deliver on many fronts in the Budget, he has to do now, having run out to the financial community globally in terms of what he is going to do but there are risks out there which are not just in India but globally going to glossing over because we can have all the liquidity which keeps us away from the problems that are still bubbling underneath the surface.
Q: How is the appetite for some of the government issuances which are opening like Oil India today, National Thermal Power Corporation (NTPC) next week?
A: Oil India will be well subscribed. It is a play now on what has been happening in deregulation in terms of diesel prices. So, the upstream companies like Oil and Natural Gas Corporation (ONGC) and Oil India will continue to benefit from that. For NTPC it depends on the valuation. The whole sector is just fraught with danger at the moment. So whilst it has been a great call to jump into the infrastructure, power companies, it has not really paid in the past few months and there are a lot of issues yet to be resolved. I am happy to wait for those to be resolved, like telecom sector.
A few months ago, I was confused and until my confusion goes away I am not going to touch the telecom sector. I think that confusion has gone away. We have started to see some pricing power come back to the companies and that has been reflected in the performance of the stocks as well, so we have been participating in that. I would rather wait till I get clarity than try and take a bet that the government is going to do something positive initially.
Q: Given our performance versus other markets, would you say the great risk for February is an outflows situation and have you begun to hear of that at all, at least questions being raised about India’s performance and whether it merits the kind of money it is pulling?
A: No, I have not heard that people are going to pull money, but when you are getting to 15 times one year forward earnings then there should be a pause. When you are looking around is there any better game in town than India in terms of the Brazil, Russia, India and China (BRIC) countries, Russia has lots of problem, Brazil is starting to come through and is looked a bit more favourably now by investors and China, we had a very strong rally since the beginning of the year.
More eyes are towards China than India at the moment and you could see more flows incrementally going to China going forward. I am not saying you are going to see a big pullout by foreign institutional investors (FIIs) in February, but if that risk-off trade comes then you could see people taking some profits or taking something off the table depending on what that global risk might be.
Q: I was just going through Ambit note on the draft recommendations that have been made for the banking industry and how they would have to change their provisioning norms. How do you think it is going to move both for banks and for many companies? Is it going to tighten an already tight lending system or do you think this is a welcome move?
A: One, in the draft there will be representation by a lot of players. I tend to look at drafts in India as being a work in progress rather than something which I need to act on now. Usually, the outcome or the final recommendations are slightly different than what the draft would say. So, I would not react today on what that draft is saying. I will wait and get more clarity before making big moves and decisions on a draft policy paper.
Q: How are you going to be positioned right now? Given your suspicion that the market might enter a corrective groove would you still not want to churn away entirely from the high quality defensives to the more cyclical route?
A: We have not done exactly that. We have kept with the defensives. We were not overly convinced that we needed to make that big switch which everyone was talking about at the beginning of the year. For the index in January, the big movers were stocks which were under-owned both domestically and globally which is Reliance partly to some extent and Infosys. Who would have expected those to be the leaders of the index including ONGC at the beginning of the year?
The whole interest rate argument is finite and I have no problem with it, but I had to be more convinced that the economy is going to see the green shoots coming through in terms of real demand which I am not hearing from corporates, before I want to switch into the high-beta, high indebted, questionable management type companies.
I am happy to be in defensive sectors, have some interest rate sensitives, have the best companies. Within that I am still on the private banks more than the Public Sector Undertakings (PSU) banks, but increasingly I am looking at the PSU banks as being an area I want to participate in the next few months. Stock selection in that sector is key. I have not bought the Lanco Infratech, GMR Infra, I have not bought any of those that you said are moving today and I have got time to do that.
Q: Do you buy the newfound optimism in the PSU oil space though?
A: ONGC, Oil India and Reliance are the ones that we are playing. It is fraught with danger, isn’t it? The government can change their views on what they have to do. It is going to be political as you get further into the year. I do not want to play the Oil Marketing Companies (OMCs). I do not think they are going to be beneficiaries of this move. So I will go for upstream rather than the OMCs at this stage. It is like buying with fingers crossed I suppose.
Q: The big revelation last month has been real estate and now the focus seems to be shifting from the smaller faces to the big guys. What are your thoughts on that? Are you getting into realty at all?
A: We have always played with DLF partly because its land bank is across the country and if you are expecting interest rates to fall on a sustainable basis over the year which we do, then DLF which as a management team is starting to get its act together in reducing its debt and delivery announcement and the promises it has made and that is the one that we have focused in on.
We have not looked down the likes of Unitech. It is a trading buy rather than I want to hold for the next six months to one year. I would like to see the management take more action on their problems and their debt before being more convinced about the stock. So, I am looking at real estate, but being very selective and DLF is the main play for us at this stage.
Q: With regards to India, what would you point to as the key global risk? Is that what happens with the debt ceiling debate which now seems to be pushed to sometime towards May? Is it crude which has begun to rise again or do you think it is going to be something that is lying latent like the eurozone again?
A: The whole summer season is fraught with a bit of danger. You mentioned that the debt ceiling has been pushed to May and I am sure the noise will get a lot more before May. July-August, ahead of elections in Germany, there could be a lot more rhetoric coming out from Chancellor Merkel towards her European friends given that there are elections and she needs to win them. So, the summer could be a little more difficult than people’s anticipation.
The risk for India is the risk-off trade coming globally and it being some event, could be higher oil prices. It could be something that happens in eurozone which takes flows away from India. The current account deficit (CAD) is a big concern for me and is something I am going to continue to watch, because if the currency starts to depreciate again, then all the hard work that India is trying to do at the moment would just be wiped-off in one go and that would scare investors if they saw a depreciation of the rupee rather than appreciation.