Indian market valuations currently are challenging pushed by higher performance of global markets post Budget 2017 and in case of downturn our market does not have a leg to stand up, says Andrew Holland of Avendus Capital.
Speaking to CNBC-TV18, Holland said that businesses are coming back on track gradually after demonetisation. The economy, however, is likely to slow down further if goods and services tax (GST) is rolled out on July 1.
He prefers private banks over PSU banks because of their ability to grow market share and when growth picks up they would be in a better position to benefit from that.
Moreover, government push for affordable housing and infrastructure is likely to help building materials space.
Below is the transcript of Andrew Holland's interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.
Anuj: What is the logic behind the new long/short fund?
A: As you previously know, the team had managed one of the largest long short funds in India previously. The logic behind it is really that is a continuation of what we have been doing for the last 12 years. And over the last three and a half years since SEBI has allowed alternative funds in India, we find that the long short or the hedge fund has found a lot of acceptance with investors of managing through markets whether they go up, down or sideways and delivering a consistent return with lower risk than the markets or other relative funds.
Sonia: If you were all in right now, with all the money in the alternative investment funds (AIF), what long and short percentages are we actually talking about here?
A: We consistently always have, whether we are very bullish or bearish or even neutral, we always have a minimum hedge of 30 percent of the fund. So, for example, if we are very bullish now and you give me Rs 100 then Rs 76 would be in our long position and Rs 24 which is 30 percent of 76 would be in the hedges or short positions. So, we always have a minimum hedge of 30 percent. But obviously it can be higher than that. It could be 40, 50 or 60 percent depending on what risks we see in the markets.
Anuj: How are the markets poised right now? Are we at a big inflection point?
A: Inflection point, I am not so sure about. Valuations are pretty challenging at the moment, they are quite high in our view and the last push of the market after the Budget has really been global market performance rather than India has become more attractive since the Budget. If anything, we are just being pushed up because global markets are moving up themselves. My view is that if you take, global markets might see some downturn and the Indian markets do not really, at these valuations, have a lot of legs to stand on.
Sonia: So, what is the probability that aggregate markets turn south in a 5-6 percent kind of way from here?
A: I definitely think the risks are on the downside rather than the upside at this moment. I just said that basically, our market is being held by global momentum rather than our own momentum since demonetisation. We are starting to see a gradual pick up in trade, but it is not V-shaped and of course, if and when goods and services tax (GST) is rolled out which is July 1, then I would think that that also has a risk to the downside for the economy. Maybe that is a little bit of a shock which the economy will have to take in terms of implementation. So, if anything, the risks are more to the downside for the markets, but global markets being favourable at the moment, that will keep us where we are for the time being.
Anuj: What is your call on earnings now?
A: If I look at 2017-2018 or full year, 2018, most analysts are still forecasting 20 percent growth in earnings which they have done for a number of years now. I do not think that is likely. We are near more 10 percent and that is partly to do with my more negative news than GST, but also, I do not see this V-shaped recovery in trade after demonetisation either. So, I have been a little bit more cautious on the earnings growth for 2017-2018 at this stage.
Anuj: Which sectors look best placed right now?
A: Going to the sectors which we like, we still like the private banks over PSU banks. We think the private banks will continue to take market share partly because of where they are in technology as well. But, they are in a better position as the growth starts to pick up to monetise that. Building materials, because we like the affordable housing moves by the government. We think that will help the building material sectors along with obviously fiscal spending by the government on infrastructure. Those are the two main sectors that we are liking.
And then there are certain stocks we like within individual sectors with a theme more towards global growth. So, if you think global growth is going to start to rise, which we do, then I want to be looking at companies which are beneficiaries of that. So, if it is the auto sector them companies which have either exposure or manufacturing in either US, Europe which would be the beneficiary of an increasing GDP growth there.