Not enthused by the sudden surge in Indian equity market, Andrew Holland believes a reversal is lurking round the corner. Speaking to CNBC-TV18, Holland, CEO equities at Ambit Capital, says there aren’t enough triggers to hold market where it is now and Nifty may head towards the 5200-5300 level.
Among the negatives facing India, Holland chalks out muted earnings growth, a fall in rupee if foreign institutions sell again and failure of the reforms to yield the desired result.
Recent data from Germany has punctured a lot of revival hopes which will aggravate the turmoil in Europe and that will have repercussions on India, says Holland. He foresees global markets having a huge fall in May and India will be part of that sell-off.
Below is the edited transcript of Holland's interview to CNBC-TV18.
Q: How are you feeling about the global backdrop now? It has turned volatile again.
A: It is looking quite grim actually. The numbers from Germany that came out yesterday and the confidence index were quite shockingly bad. Auto sales are down 10 percent plus in Germany. I do not think it bodes well for Europe at all. I do not think that is the reason why commodity prices have fallen off. There is something happening out there, which is not very good and it will play out over the next few weeks.
While I could be very positive about the implications for the Current Account Deficit (CAD) here in India, my feeling is that Nifty is probably going to see 5200-5300 first before we even think about moving higher. So, the outlook looks a big grim globally. It is the results season both in the US and here. If the companies reporting recently are posting better results then I am just trying to think what will happen for the rest of the results season.
Whilst TCS and HCL Tech have posted great set of results, there are no surprises. If anything, more worries could be the visa issue in US for IT companies and valuations do not really make it one sector which one would want to chase, particularly the likes of TCS. So, I am not sure of what is going to hold this market up. I just think it is going to come down with news selling from Foreign Institutional Investors (FII) because there is going to be a global selloff because of this commodity fall. It is probably telling you what the picture is going to be like maybe a month down the road and that is not going to be very nice at all.
Q: What do you think is more probably happening in this global commodity collapse? Do you read it, for now as some kind of technical adjustment where there is some risk aversion, there is a margin call crisis and that is probably what is playing out? Or do you think it is a much deeper growth malaise which is going to have deeper ramifications for markets globally?
A: One of the problems that we have had in the past is that a lot of liquidity would find its way into commodities and that was going to keep the prices of oil and other commodities quite high. This year everyone was talking about the credit rotation trade from bonds to equities. Actually, it is from commodities to equities.
Bond yields in US are still way below 2 percent and infact, bond holdings have been rising. So, there has not been that big rotation trade. Now, with some of that easy money coming out of commodities, we will perhaps see the real gauge of what demand is globally and perhaps that is going to be the shocker for us.
With the International Monetary Fund (IMF) recently reducing growth it can only get worse. We are three-four months into the year and already forecasts are being lowered for growth. So, it is kind of a déjà vu. This time last year markets rallied very strongly in the first few months only to test everyone’s patience again in summer before the big liquidity event. This time around, that liquidity event in Europe might be held back because we have German elections in September. I am sure Angela Merkel will want to try and win the race again. There is going to be a little bit turmoil in euro coming through. So, oil should have been north of USD 80 in terms of what the demand is and the slowdown we have seen in the world and that is reflected in the Brazil, Russia, India and China (BRIC) performance.
Brazil and Russia’s markets are actually worse than India for once and China itself is slowing down quite quickly as well. I am not saying there is no hope. There is always hope. I think in the very short-term and I am talking about between now and the end of May, we could see a big fall in global markets and India will fall. It could happen as early as next week.
Q: The only hope is that since commodities are correcting, India will probably fall less than other emerging markets in the event of a global selloff. Is that just a wishful thinking?
A: It is always wishful thinking to say that we can decouple ourselves. We had a lot of flows- USD 10 billion so far this year. If risk-off comes to the global markets, then I am sure Exchange-Traded Funds (ETF) will have to sell India and that will be very concentrated. It will be on the blue chip stocks. I do not think anyone here is going to try and catch that falling knife. That is really where we are going to be and it will be a scary story globally. So, we will all sit on the sidelines waiting for the central banks to come and bail us out again.
Q: Where do you see the biggest source of global risk? We have not had a major risk-off event over the last many months in global markets. Do you think it is coming from Europe again, is it from China or do you think the strongest market US might actually lead the disappointment?
A: In the US, we are seeing some very mixed numbers recently. The US is probably more of an earnings story. The whole earnings rise and margin improvement is now over and there was quite a lot of inventory back up to the GDP for the US in the first quarter, so we already starting to see forecast coming down. What this commodity fall could really be telling us is that there is a demand shock out there to come. Maybe that emanates from Germany or China which will scare us all, particularly Europe if Germany is starting to turn down very quickly. So, that is probably where I would see the biggest surprise in terms of downside, in countries like Cyprus, Greece or Portugal. We all know this problem. I do not think we walked into this year thinking there is going to be a demand problem. Maybe that is just starting to be realized now in the commodities market ahead of what would be a disappointment. This is because everyone was banking on the US and Europe. For US to start growing, Europe to muddle through and start to show some signs of recovery is clearly not happening. So, maybe, that is what is going to scare us all and while I can think about the positives for India in the medium-term, I do not think we can escape that global selloff. It is difficult to time these things, but markets always have the habit these days of pricing it in very quickly.
Q: The counterargument that calls for correction has been the policies employed by some of the central banks. The Bank of Japan (BoJ) had a game changing decision. Do you think that may limit the losses or at least limit them in certain asset classes with this money ensuring that not everything crashes to the extent that we have seen in assets like gold and crude?
A: Japan has been a game changer for the economy, for the stock market in particular and that is really what buoyed us all in the beginning of the year. It is a high-risk bet that they have taken in terms of getting the economy moving and we will have to see if that works. If it doesn’t, they just got more debt and that would be scary just in itself.
The jury is a little bit out in Japan. It helps the exporters. If one has a demand shock, then who are you going to export to? At the beginning of the year, it is a great trade, it has worked well, but if the world is slowing quicker then we think, then we go back to the same problem. Japan’s better growth than no growth is just ok, but if one asks if that is going to be a panacea for global growth, the answer is no.
Q: Do you think any selloff in the Indian market this year or in the next few weeks and months would be a global liquidity affair or do you think people will come around to thinking that because of global growth tapering down maybe our own Indian estimates of GDP and earnings also need to scaled back this year?
A: Without even taking a global shock in terms of demand shock, if one speaks to any corporates at the moment, whilst on camera they might say something different, privately they are just saying, "listen nothing has changed."
Since last September, we had a lot of noise from the government. Yes, reforms did happen, but on the ground nothing is changing. Why should I push investments at the moment when there is uncertainty of who is going to be in power? This is irrespective of whether it is next May or earlier and therefore, I would rather pay one person than pay up now and then change it again six to nine months later. So, corporate India is doing nothing. While one can talk about the financial impact of lower interest rates and the financial gearing of companies that is going to be helpful, but it doesn’t help if one’s top-line and margins are being hurt in terms of the slowdown and if the operational gearing is much higher.
Therefore, we have pared the earnings growth that we were very confident of at the beginning of the year. So now, we expect Infosys to grow at about 10-15 percent and probably nearer to 10 than 15. If we have a global slowdown then GDP in India could be 5 to 5.5 percent quite easily. If nothing changes it is probably heading there anyway. I am sounding very pessimistic, but I am reflecting reality. This is what is happening on the ground.
Q: The only technical change that has taken place in the last couple of days is a big resurgence for the currency, the Indian rupee. Do you think that could be a tactical positive for us in terms of flows getting more interested in this market because of the way the currency is holding out?
A: The FII flows have been minimal. It is hardly anything. So, I would not get excited about that. My concern would be if FIIs turn bigger sellers. Then that would put more pressure on the rupee. So, some of the nice gains that we have seen with commodity prices fallen could be wiped out if the rupee starts depreciating again. When external events work in one’s favour, and you have really nothing to do with it, then that is a concern for me. One should be looking at ones structural problems to alleviate that going forward. I do not think the government has a handle on that whether it is the land acquisition, coal purchases, coal linkages or infrastructure spending. It is just not happening.
Q: If your call is 5200 Nifty, do you think that is the floor for the year? Or do you think you are in for even greater pain during the course of the next few months?
A: Let’s just say if that target is reached, one always has that caveat of saying, ‘let me look at 5200 and see what has caused it’. If the scenario I talked about plays out that would be a great opportunity and I would certainly be looking to buy the market then.
I have been looking and thinking when to switch from defensives, when to go to interest rate sensitives, when to get into capital goods and when to get into all these sectors which have been out of favour. That, probably would be the time that I would make that switch. It would be depending on the global events, but that will probably be the time I would make that switch. I have not been tempted. It is very tempting at the beginning of the year. As everyone was saying move out of defensives into these areas. We never made that switch and fortunately we have got another day to come which we can do that. We will be looking to make that move. 5200-5300 is the area which I am looking to do that.