The Indian market rally seem to have taken a pause and Andrew Holland of Ambit Capital feels it is just a temporary phase before the market again starts moving upward. He is hopeful of seeing the Nifty around 6,000 by the end of the year and 6,400 by October 2013. Besides, Holland believes lower interest rates and earnings growth to support market in 2013.
Holland further stated that global markets are awaiting cues from the new leadership in China and he does not expect the Indian market to be influenced much by the US Presidential elections. At the moment, investors can continue to accumulate quality cyclicals at lower levels, advised Holland.
As far as the RBI's rate cut decision in its October 30 monetary policy meet is concerned, Holland thinks the central bank would ideally want to see more action on the fiscal side. He also anticipates a 25bps rate cut.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Do you think the best of this rally is behind us or is this merely a pause before the market takes off again?
A: I should think this is a pause and we had some great news over the late summer months, not just from India in terms of reforms but also from the European Union and the Federal Reserve (Fed). It is all very supportive. I think we got a little used to reforms every week or expecting reforms every week.
We are back to fundamentals and the result season. That is keeping us a little occupied. There is nothing new that is coming out of the global economy at the moment, if anything the situation in Europe is still confusing.
What will propel the market to say 6000 on Nifty? One of the events that I am looking at very closely and this is a key not just for India, but for global markets is what happens in China when the new leadership takes over in November. My bet is this is once in a decade kind of change. They will come out with some form of stimulus package. Though, I'm not quite sure what but, that will help global markets because what we have is expectations that China getting back on the growth track for 2013 will help the global economy.
The US is already showing signs that it is coming through slowly in terms of its recovery and that could have fund managers around the world chasing the year end performance. That would be the event I am looking for, which will help global markets as well as India and probably get us that 6000 on the Nifty.
Q: By when? Do you think it could be a surge into Diwali or do you think it might be a year end kind of an event, the levels you are talking about?
A: It depends. The leadership in China takes over in November. It could be a post-Diwali event and towards the year end I am seeing this kind of a big rise.
Q: In the interim, do you see this pause just being a sideways kind of a few weeks in the market or do you see the possibility of a retracement?
A: No, I don't think that we are going to see a big retracement. October has been synonymous for Black Swan events over the years. Unless something comes out of Europe, which we have all missed, then I think markets globally are just consolidating going through results season which is probably not so great globally and here. There are a lot of pressures.
I think everyone is listening to the body language of companies and how they are looking at the balance of the year and also 2013. So far so good from what we have been seeing. When we got to 5700 on the events which unfolded in early September our view was that we are probably done for the time being. It will take a China event to propel the markets further ahead. A consolidation for me is no bad thing given the strong run we have had not just in India but globally.
Q: What about the other big events in November, the US elections and the parliament session closer home? Do you see any risks their which might derail this uptrend?
A: With the US we will have to see who comes as a winner. They are divergent in what they are thinking about tax, but I do not think it is really going to move the markets one way or the other. If you are seeing Mitt Romney creeping up in the path, I think the markets would have been taking that view that they don’t like that and that would have been reflected.
I don't think the markets are going to get too spooked by the presidential elections. Let's talk about the fiscal cliff, it is something that can go through. I think for India there are rumours that the parliament session could be moved to January because of the local elections. That's always an option for the Congress to play, but if this happens in November, then obviously there is a risk because quite a lot of the reform process that we have seen will have to get parliamentary approval.
There is a lot of talking behind the scenes before that parliament session opens and deals being done to get the bills passed or we will be back to square one and I don’t think the markets would like that. But the good news is that if it is delayed to say January you could see a slew of news and reforms which have to be passed. That could keep the market momentum going as well. I am a little worried if the parliament takes place in November that would be a key test of Congress support.
Q: Do you see flows picking up again after the kind of pause that we have seen? Since September we have sucked in a few billion dollars, going into the end of the year, do you see a strong gush of flows?
A: If China delivers on those expectations in terms of a stimulus package then yes, you see liquidity globally jump into the stock markets. If you are looking at 2013 with a much more positive view on growth in the US because of China starting to pick up, you are going to get a shift at some stage from bond into equities. That is going to happen not just for the US, but will obviously happen globally. If people are chasing less yield and more growth that obviously reflects itself in the emerging markets (EMs) and India is a big player in that.
I would expect some very strong flows to the backend of the year ahead of potential reassessments. I think India stacks up for continued FII flows in 2013 as well. Net-net you are going to get a liquidity driven growth focus towards the backend of the year and India will be at 6000 Nifty if what we are expecting happens.
Q: Is that a tactical call for the next 2-3 months and you would want to wait and watch how 2013 opens up and unfolds? Is your call structurally bullish and 6000 is just a pit stop that you have outlined for the end of this year?
A: When we talk long-term these days, people tend to begin with what happens with short-term events. But, if I lay out where we are today to where we will be this time next year, then I see the Nifty around the 6400 level. I think we will start to follow earnings growth next year and we are looking at 10-15 percent earnings growth from here.
If I am right in terms of China stimulus and growth picking up, then throughout 2013 we will see earnings being upgraded in India, going forward with the expectation of lower interest rates and global growth starting to pick up. That would give me a longer-term view of where I see the market in one year's time. But, unfortunately these days you have to look at shorter term as well as longer term. Net-net 6000 for the year end, if China comes in and this time next year around 6400 on the Nifty.
Q: How much of a role could the Reserve Bank play? October 30 are you expecting something and going forward, over the next 3 to 6 months do you think the central bank will add to the kind of mood of optimism that we are seeing in equities today?
A: I think they did it last time around. We recently met with the RBI and the body language from them is more accommodative to what the government has been doing. They readily admit that inflation and the fiscal deficit is still a problem and they would like to see more on that front. But, the body language is definitely more positive towards the government.
I think they will reduce rates this October probably by 25 bps, maybe even more. But I think they want to support the government in the role of trying to get India back on the growth track and believe that the government is going to make the right moves to help that and will continue to take action or will take some action to rein in the fiscal deficit as well.
I think they are going to be accommodative and that is the message you are starting to see from the Finance Minister in terms of pushing the RBI. The RBI also saying, listen we can also take some risks going forward. My expectations remains that rate cuts will happen in October.
Q: How do you play this upmove, what is your favourite theme to be playing this upmove that you have been talking about for the market; through cyclicals, through taking on a big of additional risk or stick to some of the high quality blue chips?
A: It is easy to say let's jump down and buy all the companies with high debt, managements with corporate governance issues because those are the stocks which will perform. What we have done or what we are doing is we are keeping to some of the defensives. We don't think that theme has gone away, there is still growth in stocks and we still think there is going to be performance.
But what we have been doing is adding a little more of the interest rate sensitives, looking more favourably at real estate. But, would I go to Unitech at this stage, I would rather look at DLF. I know it has its own political problems at the moment but, if we are going to play a real estate company then I am going to play DLF because I am going to get the reduction in debt going forward. Obviously if there is a bounce back in the economy then they are a player across the country.
That is way I would like to look at these stocks. But you are going to get high beta and you are going to be in those high beta for very short periods. Unless you really believe that management is very strong, corporate governance is very strong and you see the economy picking up, they would be leaders in that sector.
So we are nibbling away at a few of these. But, we are not saying let us forget defensives or strong companies and just go straight to high debt, high beta, questionable management at the moment.
Q: Do you think this market will continue to frustrate skeptics who still probably have that view that the macro is weak, earnings are not accelerating and therefore, people are getting excited for no reason. Do you think that part of the participants or that part of the crowd might continue to be frustrated by stock prices?
A: Sure. Of course you will be frustrated if you are seeing the markets go against your overall fundamental view. There might be a kind of lonely crowd at the moment, but sentiment can change very quickly. If you just take yesterday, we had low volumes. The currency was weakening again. Inflation was high. There was nervousness ahead of Axis Bank and Reliance results.
If they would have been poor, if you would not have had an overnight rally in the Dow we would have been focusing back on the negatives which are still there. Despite all the reform measures the Finance Minister has announced, nothing has really changed on the ground. There is a lot more expectation, lot more hope and a bit more confidence, but really nothing has changed.
When I come into this results season, I am less worried about what the results were because the share prices would have reflected that well before. It is really what the body language of corporate India is saying to me now and what their expectations are. Are they starting to think about investments again? Are they seeing any incremental orders come through? Are the margins starting to improve? Those are the kind of things I look at.
I can take a one year look and have expectations, but we are not out of the woods. We are not out of the woods in India. We are not out of the woods in Europe and we are certainly not out of the woods in the US. There are still a lot of headwinds that can come in and can change our views and sentiment overnight.
But, at the moment I am not seeing those headwinds happening at least before the end of this year. I remain in the bullish camp at this stage. But as you have said, October is a month where you see events which you wish you did not.