May 17, 2013 04:41 PM IST | Source: CNBC-TV18

Market's complacency scary; 5500 bottom for Nifty: Ambit

Andrew Holland, CEO, Ambit Investment Advisors, said that inflows seen coming into the Indian equity market are primarily ETF driven and ETF inflows could reverse quickly.

Andrew Holland, CEO, Ambit Investment Advisors feels markets' complacency with respect to this global liquidity driven rally is scaring because they have been ignoring bad news from Europe. Also, this rally is not resulting into any earnings growth.

"Nothing has really changed in India, so I need to move from defensives in my long side of the portfolio to more kind of interest rate sensitives or companies with high debt," he said in an interview to CNBC-TV18. He sees 5500 as bottom for the Nifty.

Continuing his bearish stance, Holland added that inflows seen coming into the Indian equity market are primarily ETF driven and ETF inflows could reverse quickly.

He also pointed out that the bond markets have started to show sings on fatigue.

Meanwhile, unlike many experts, he doesn't see the Reserve Bank of India obliging the market with a rate cut in June despite the fall seen April inflation data. However, a rate cut in July is likely, Andrew added.

Also read: Macquarie explains how banks look post Q4 earnings

Below is the edited transcript of Holland's interview to CNBC-TV18.

Q: Are you a bit surprised with the way things have turned out in May globally and locally?

A: I am always surprised with liquidity driven markets. I am surprised how valuations can get stretched not just for India but globally too. I saw a report yesterday saying in 40 years it is one of the biggest rises globally with very little or no earnings growth.

So, it is all about liquidity. Until that party stops, we will just have to keep with the momentum. We know that we will stop at some stage. How bad would that be? We would have to wait and see. It is just liquidity right now, there is no driving factor in the India really on the fundamental side.

Q: Tactically though, is it best to ride with this or are you guys stepping off this rally?

A: What will keep renting these high beta, poor management banking stocks and anything that’s kind of got the momentum? One is wary about what could happen globally. Nothing has really changed in India and that’s what’s keeping me from saying that I need to move from defensives in my long side of the portfolio to more interest rate sensitives or companies with high debt. So, I don’t mind renting them but I am not going to own them and that’s the key for me at the moment.

Q: What can go wrong in global markets now because when we talk to investors, they say that European tail risk has been taken out, the US and Japanese liquidity will not be withdrawn in any hurry so why should we worry, we should be putting money into stocks? Does it smack of complacency or do you think that markets may actually be okay for a few months globally?

A: At the moment, the complacency is there because good news is seen as great news and bad news is seen as good news. A few days ago, France came out and declared it is into recession for the third time. We quickly just wrote that off and believed that the European Union will just throw more money at it. That is what everyone is expecting.

Everyone has come back to central banks. When one has got every, virtually every central bank from Australia through to Turkey reducing interest rates, trying to get the currency to depreciate, something will give it some stage. It is going to be in the bond markets somewhere.

There are lot of companies out there issuing bonds because people are just trying to get as much yields as they can. Some of these companies do have questionable accounting and business models. So, something will catch up and I think it is going to be the bond market and I think that’s where the scare is going to be. It doesn’t take much for the markets to worry. Few weeks ago, just because of a Wall Street Journal report, Bernanke might be changing his stance.

We saw bond yields rise very quickly in the US. So, we are all looking at how Bernanke will manoeuvre US into higher interest rate regime going forward. I don’t think I have seen that happen without problems before. If one goes back to think about China two years ago, I remember I was talking about how it is going to be a soft landing with no problems and the world will continue to grow and that’s not been the case. So, I think we are seeing it all with just too high, rose tinted glasses with respect to the liquidity but something will snap and when it does, as we saw with gold recently which again was a favourite commodity for people to have, the fall could be quite sharp.

Q: What’s making India stand out though in this entire liquidity run because any amount of data that shows India is actually pulling more money than the rest of the region, India and Taiwan in that order in the last couple of months. Why is India getting the bulk of it and what is the source or nature of it you think?

A: I think its exchange traded funds (ETF) in particular. I think it’s a shift within global funds towards India. If one just looks at some of the competing markets like Brazil and Russia, obviously they are going to be affected by lower commodity prices and those markets are down year-to-date despite the global rally.


We are still seeing India as the cleanest shirt in the laundry basket and that continues to get the flows. So, the good news is that India is outperforming those markets but year-to-date it is only up about four percent whereas some of the developed markets are up 15 percent and Japan market is up 40 percent.

It is going to be taken in context. It is underperforming global markets but it is coming after a great year in 2012, so not so bad. But the currency is not helping foreign investors at the moment to not get any currency appreciation to help those gains. So, my concern would be if India does get risk off, ETFs will quickly move out of India because the trade was not worth for them.

Q: At this point, what do you think is the key global threat? Some kind of contraction in that liquidity or is it the Eurozone as many global market watchers are pointing out that seems the region most prone to blow up?

A: I don’t think it is going to blow up. I don’t think that’s my concern. I think it is more in the bond market. I think bond markets are showing some signs of fatigue and I think whilst we have had global markets rise, there have been no earnings growth. So, one might as well see markets really doing nothing in the short-term because there is nothing to propel the valuations from where they are today. If one gets sell off in the bond market, increasingly people will say that, that would be good for equities.

I am not sure it will be because it has its own problems and I think those problems will come out to the fore once we see any blow up in the bond market. That is what I am more concerned about. I don’t think Cyprus or Greece are going to have any more problems, I think they are all well known but it is really what’s going to happen in the bond market.

Q: What do you make of all these expectations and talk of big rate cuts from the Reserve Bank which could be getting a lot of money interested in India once again?

A: It is quite interesting that the market grows on the back of the RBI governor saying he noted the fall in inflation and we all jumped on said he was going to reduce interest rates as quickly as June.

I am not buying that. I don’t think that’s going to happen at all. Commodities remain quite volatile and it is out of India’s hands. We still expect 50-75 basis points over the year but I will be surprised if he will act so quickly in June. July maybe be the first time when he can do something. When one speaks to India Inc, one knows nothing is moving, nothing is happening, there is no spending going on.

Everyone talks about the banks having their own problems in hiding the non-performing loans and delinquent loans. So, there are problems out there for India. The good news, on that because bad news is good news these days, is that obviously the economy is going to continue to struggle along if not see more downgrades to growth and that will give the  Governor ample room to reduce interest rates. But I don’t think it will be as early as June.

Q: Is the deal landscape still quite active though because we have seen that. A lot of companies have successfully raised cash for themselves whether it is in the form of IPP or something else. There was news on JM Financial last evening. It looks like a lot of individual stocks are going about their money raising business quite successfully.

A: It is interesting that Vikram Pandit wants to put money into distressed assets. That really sums it up where India Inc is at the moment. There is a lot of distress out there and it probably is a lot more than USD 100 million to get some of these companies even there to getting that balance sheets fixed. There have been some very high profile deals, Unilever being the biggest although the share price only can reflect where it was prior to them increasing royalties. So, I am not sure if that was such a big move that people first thought it was. But this is all of interest in terms of long term India story.

That hasn’t gone away and it won’t do but I think these are very small pockets of foreign direct investments whereas India even after opening the retail markets globally, we really haven’t seen any one on the multi-brand retail anyway come in and put any money down. I don’t think that’s going to happen for sometime given you have concerns about when the next elections will be and which government gets in.

We are all happy because of liquidity. There are many problems out that and the target when you mentioned the last time we saw market highs was in November 2010. That was just around the same time as the 2G scandal broke out as well. Just look where the markets were in January of 2011.

Q: In terms of downside risk for the market because of the points you are making, how deep do you think the downside risk is for this market?

A: The bottom seems to be around 5500 on the Nifty. It would take some real negative news to get there in this environment, but once it is there, then we would have to see if there could be a further kind of lowering figure from there towards 5200.

The downside from here is 5200-5500 on the Nifty. If it gets there then that’s we are really thinking about moving from defensives to the interest rate sensitive. The companies with higher debt, not one’s with questionable management.

Q: In terms of time, do you think we could pass through this summer without any meaningful correction and the factors that you spoke about might crop up later or are you expecting June-July to see some rough whether?

A: It’s a current reversal what we are seeing. Usually, you have seen markets kind of move up in the first part, come off during the summer because you have problems coming out mainly from Europe in the past few years and therefore we had a huge liquidity bubble being set up again with the European union and the federal reserve.

This year it is going to be really brought forward with Japan and all central banks cutting interest rates globally to remain competitive in terms of their currency. We probably had the early fixed for most of the years so I think from here we have got to drift down.

It only happens in the bond market that could accelerate the losses. So, I think it is going to be more volatile months ahead of us - that’s for sure.

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