Market has rallied to new highs after BJP's clean sweep in Uttar Pradesh elections and only weak fourth quarter earnings can put an end to this momentum, according to Andrew Holland, CEO at Avendus Capital.
"Third quarter earnings have been poor, and companies have also brought down their growth forecasts. So the only reason now for the market to correct can be the earnings," he said.
Ashwani Gujral of ashwanigujral.com said that the Nifty, although capped at 9,220 points in the short-term, will continue on its upward trend as long as it manages to remain above 9,000.
Holland also said valuations are stretched and the market is experiencing a fundamentals block. He opined that the economy has not bounced back after demonetisation and the industry did not see any V-shaped recovery after the cash ban.
Holland said the Goods and Services Tax (GST) is going to be a long-term positive for the market, although there may be some difficulties for the first three months after implementation. He sees a global pick up in the commodities sector especially the metal space as the dollar weakens.
Below is the transcript of Andrew Holland and Ashwani Gujral’s interview to CNBC-TV18’s Sonia Shenoy and Anuj Singhal.
Anuj: All-time highs, what next from hereon? I don’t know if you have started to put money right now in your new avatar but if you were to put some more money, do you have good levels?
Holland: It has been a great week, hasn’t it, I don’t really want to kind of throw cold water on the index highs. However risks are there and the risks are probably a little bit to the downside and upside. To be honest the momentum, not only just the momentum but sentiment globally is just very strong at the moment and very positive. So, markets not just in India but globally will continue to kind of forge ahead. This liquidity driven rally is not just happening in equities, it is happening in bonds as well. So, the party is on and people want to participate in it at the moment but as you mentioned in your introduction, there is always something that will burst that bubble temporarily and bring markets back more towards fundamentals. At the moment as I said sentiment and momentum is pulling us higher.
Yes we have launched the fund and yes we have invested and we are pretty much hedged to about 40-45 percent taking into account where the markets are and the risks that could have evolved at any time. We don’t think about market levels, we just try and make our returns over the year whether the market goes up from here or down from here or sideways.
Sonia: A lot of people like you and me have been pinching themselves to see if this is a dream or indeed has the market really hit new highs because we have not seen so much participation especially from pockets like retail but what is the sense you are getting hereon, do you think that this could be a sustainable upside and is this the time for retail to put in fresh money to work?
Holland: The thing that just concerns me a little bit is that the valuations do remain pretty much stretched and they have been stretched for some time. It will be interesting to see the quarterly results. The kind of feedback we are getting from corporates is that the economy is not really picked up and they have not r really seen any “V” shaped recovery since demonetisation.
So, that could be some fundamental block for the markets going forward. If GST is implemented on July 1 2017 which it is looking like, while we all like GST in the longer term framework, it does have that potential to kind of halt the economy for 3 months or so or disrupt the economy because of implementation problems. So, earnings have already been brought down since the beginning of the year, forecasts have been brought down from 20 percent to 15 percent and I suspect there is another leg down. However as I said you just can’t fight the momentum at the moment. So, we just have to see what gives the market some time for either a pause or correction and that could well be the earnings season actually.
Anuj: The dollar index has made a move below the 100 mark, we have seen so much FII in flows over the last 3 or 4 days after having missed out for better part of the big rally that took place before that. What kind of flows can we expect from hereon because we have seen it in the past, sometimes these flows driven by momentum can be humongous?
Holland: I think a couple of things happened for FII flows, apart from the good news in terms of the BJP winning the UP elections. Obviously that gave a lot of confidence to foreign investors thinking about the longer term consistency for reform process to continue. So, that was the first part of it.
The second part of it is after the Fed or maybe in anticipation of the Fed raising rates, the concern was that emerging markets generally might suffer because of higher rates, then obviously a higher dollar and that would impact the ability to pay dollar denominated debt or the cost would rise. So, India became a little bit more of a safe haven in that scenario. However that has reversed and emerging markets have continued to do well. So, emerging market funds are obviously getting more flows and India has a reasonably large weight in that. So, again we are getting the flows from emerging markets.
Maybe the perception that they would suffer has moved away and the risk on trade for emerging market continues for the time being. So, that is the good news.
Second part of the good news is that, it looks as though dollar after having been strong for a good year or so, probably now will start to weaken as the growth momentum in Europe and Japan later in the year starts to build and that would probably mean a stronger euro and a stronger yen against the dollar. So, that is the kind of outlook we have. It is also very supportive for commodity prices as well going forward.
Sonia: For the last two weeks it has been all about heavyweights – one or the other heavyweight has been exercising their might. On Friday it was ITC, last week it was HDFC, the week before that it was Reliance. Where do you see leadership emerge from next?
Holland: If we are correct dollar will continue to weaken, then I would say that commodities in particularly the metals sector would be a big beneficiary of that, not only because global growth will continue to kind of pickup but also because weaker dollar would mean commodity prices have the ability to move higher. So, it is probably going to be in the metals pack which would be the one which I think would surprise in the next few weeks.
Anuj: Record week, but I know you do not get swayed by all the emotions. Tell us how to trade next week because you have been talking about the fact that despite so much FII buying, from Tuesday's high, the market did not move much.
Gujral: The problem is that you gap up and then there is no follow through. Maybe the reason is that everybody has the same view that markets should go up. Chances are that we are likely to get into some sort of consolidation above the previous highs which is 9,000-9,050 and some amount of correction/short positions getting formed would be good for the market. This sort of one way view that now we should go up because of x, y or z reason. I do not think that sounds right for the market. So I expect the market to form some sort of a range. The higher end probably has been seen which is about 9,200-9,220. Let us see what is the lower end.
Similarly, on the banks, large banks are showing lots of weakness. So, maybe 21,000-21,050 thereabouts on the Bank Nifty. Meanwhile, midcaps will continue with their own thing and they will continue to perform. But on the large indices, follow-through seems to be missing and next week the best strategy would be that if you take out yesterday\'s high, try to look for opportunities on the short side. If you take out yesterday\'s low, then probably look for bears to get trapped. So, that sort of sideways market that we have been used to is likely to happen. But definitely breakout has happened and as long as 9,000 sustains, there should be more upside finally.
Sonia: Let us talk about some money making strategies for our viewers. What would top your list now on the buy or on the sell side next week?Gujral: Several new stocks have come up. Something like Tata Elxsi, we had one of those down sessions on IT when the rupee went up, but post that, IT recovered today and particularly Tata Elxsi has crossed its 200-day moving average. So, out here, this could be one of the outperforming stocks in the tech space, target of Rs 1,700-1,750 is possible. Also, broader market, Whirlpool has again broken out to fresh intermediate highs. So, out there, we should expect targets of Rs 1,250-1,300. Consumer this week has done very well and Mahindra & Mahindra Financial Services had a strong day today. Possibly next week, we should take out the 200-day moving average even here. So, Rs 360-365 is a target. Non-banking finance companies (NBFC) have done well but these microfinance companies have not really participated. So, this looks like this could be a flavour next week.