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Jun 16, 2017 06:15 PM IST | Source: CNBC-TV18

FMCG the best place to hide; slowing China biggest global mkt risk: Andrew Holland

Globally, the biggest risk is slowing China, and if they have stated that they are buying US treasuries, it means they are likely to depreciate their currency said Andrew Holland, CEO, Avendus Capital Alternate Strategies.

It was a week of consolidation for the market, both the Nifty and Sensex were trapped in a tight range. The Bank Nifty too was down 1 percent for the week amidst talk of consolidation, bad loan cleanup. IT was the worst performing index down 2.6 percent. So what does all this mean for the market going forward?

Painting a bearish picture, Andrew Holland, CEO, Avendus Capital Alternate Strategies believes fundamentally, there is nothing which can support our market – apart from high valuations what do we have to look forward to – we have got the Goods and Services tax (GST), which could derail the economy for the next 3-6 months, then there is farm loan waiver which could send the fiscal deficit higher and a banking sector

Maybe the index won't fall more than 5-7 percent but the pain below that is going to be very severe. So, we are walking on a tight rope.

Globally, the biggest risk is slowing China and if they have stated that they are buying US treasuries, it means they are likely to depreciate their currency because growth is not there for them. Moreover, there is the risk of global market liquidity bubble burst.

When asked for his sector preferences, Holland said FMCG is the only sector if one is looking for safety and growth because GST is going to be a big game changer for it.

He not at all upbeat on pharma, IT and telecom.

Meanwhile, technical expert Ashwani Gujral of says the market can move sideways for a long-time because if the leading stocks are not making fresh highs then one cannot expect weak stocks to take market up.

Global markets too are moving sideways, so our market too could move in a range of 9450-9500 to about 9700.

The idea is to buy into strong stocks as they correct like ITC, Escorts, Century Textiles.

Below is the transcript of the discussion.

Anuj: Do you get a sense that this market is tiring out and is looking for correction because valuationwise it has really been trading above its median valuation for quite some time and liquidity has been supporting it? Or do you think liquidity will again come back to markets rescue and whether we like it or not the market would again make new highs?

Holland: That is what we are banking on right? It's the liquidity coming back. We are just walking on a tight rope as far as I am concerned for the last few months. I just hope that when we slip, there is a safety net there because the downside could be quite painful. The reason I am saying that is there are growing negatives. Let us forget valuations, let us say the liquidity goes away but in the past week we have seen few things which make me very scared about the markets. Farm loan waiver is huge, it would just blow up the fiscal deficit by minimum 1 percent. You could count it over 2-3 years but it is going to affect the economy. Two if states are doing this loan waiver then are they going to stop spending, what are they going to do and that is obviously not great for GDP growth. You have got GST and you have every one saying we are not ready. We know it if going to be disruptive, we always said it would be. I think the market is feeling this and getting more and more negative towards it.

So, if we are not saved by a bit of global support then the markets are going to take a bit of a hit and it is going to be across many sectors which are just being held up by pure liquidity and no fundamental reason for it to be there.

Surabhi: How do you look at the sort of moves that we are seeing in bank stocks given that that pretty much seems to be dominating market attention, is it not? This whole talk of resolution, the 12 so called bad companies that are going to the bankruptcy court.

Holland: I have been listening to the debates you have been having on your channel and it is as if we are saying all these 12 companies go to court tomorrow, get resolved tomorrow, everyone takes a nice haircut and we all move forward. I really wish it was going to be like that. First of all who is going to take the haircuts, how big are they going to be, who is going to manage the assets? I think all of these things don't happen overnight. So, we are just living on a bit of hope there. PSU banks are now just an out and out sell, there are now two ways about it.

Anuj: What about private banks, that is where you have made most of your money. Do you keep moving money into the private banks?

Holland: There are only two things that we think about, it is really the private banks because they will just keep taking market share from the PSU banks. It is like a dear in front of the headlights, they can't go anywhere at the moment, they can't do anything, RBI has got half of them under their control anyway because of the losses they are making. So, what can they do? Private banks is the only sector of the banking sector I would be in. Of course affordable housing finance companies we like as well going forward. So, the rest of the financial sector I am kind of lost for words in terms of why they are being held up because there is no fundamental reason for it.

Surabhi: Which side of this great pharma debate are you on? There are people who have been going out in the market, looking for bargains given how low the prices are but we keep getting these knew jerk sort of events like IPCA Laboratories on Friday, Lupin suddenly falling. So, are we close to the bottom here? Would you buy pharma stocks?

Holland: If I take three sectors telecom, IT and pharma. Telecom has been 3 or 4 years in kind of meltdown mode and its probably going to get more intense in the next 6-9 months but probably you are getting towards the bottom of this kind of cycle for them.

IT, I have taken a 5 year view here now. IT is in the second to third year of a real downturn for them and they have to change the business models.

Pharma is just starting. Pharma has to now change their business models because it is broken, same as IT. So, you will get times when we get bounces in the stocks but they are going to be derated over the next 1-2 years. So, there is no way I am looking at any pharma stock or IT stock or telecom stock. In the order of when I will start looking at them, telecom will come first, that shows you how bad the other two sectors are going to be.

Anuj: Affordable housing finance is the part you said you like. Not the rest of the NBFCs? In the past you have not liked them but some of them have corrected a bit. Anything else that you would want to buy apart from housing finance?

Holland: The only thing we would want to buy and it is one of our big themes, is FMCG. We said that GST would be a game changer. We are seeing reasonable kind of run up in the share prices but rerating of this sector is just starting. Everyone is going to switch out of IT, pharma and telecom and all of these into FMCG. It is the only place to be if you want a bit of safety, you want growth and something which will change the whole profit trajectory going forward which we haven't seen for the FMCG as sector for a long time now. This will have the margins and sales volumes really kind of picking up considerably over the next 1-2 years.

Surabhi: What is the risk to this market? The biggest risk right now, we have been in this consolidation for a bit and it could be just one day and we reclaim all the 100 points but is there something that you think can go wrong?

Holland: There is everything that can go wrong. Let us just say global markets, the liquidity bubble bursts which it can do at any time and probably is already, you are seeing it in tech, it will follow through to the banking sector globally as well very soon. What do we have to look forward to apart from high valuations, what have we got to look forward to? You have an economy that is going to be derailed by GST for at least 3-6 months. We have the farm loan waiver which is going to send your fiscal deficit higher and you have a banking sector which is broken. Apart from money and liquidity what is it fundamentally to hold up this market? Once the fall happens and on the index it could well be just maybe 5-7 percent in terms of a fall but the pain below that is going to be so severe - this buy on dips, that is why I said we are walking on a tight rope and I just hope that there is a safety net there.

Anuj: Globally any risks on the horizon because we have dealt with most of them, maybe the biggest one is still left in terms of what is happening in the US. We were talking to one of our guests earlier and he said that the risk would come from midnight tweeting. Your thoughts on whether globally there are any risks right now?

Holland: You don't need to look that far. Look at what is happening in China with interest rates. Have a look at their insurance companies where the Chinese government said banks not to sell the products.

China is slowing and there are no two ways about it. You are seeing that being played out now in the commodities market. Expect the dollar to be stronger, commodities prices to fall and China said a few weeks ago we are going to start buying the US treasuries, it is only telling me that they are going to try and depreciate the currency. They are going to try to do it slowly but they are going to have to come back and maybe do what they did in August or July 2015 and depreciate the currency. They are going to have to do it, the growth is not there for them.

So, that is your biggest risk, the market is not thinking that China is a problem anymore.

Anuj: You were making a point on Friday in Closing Bell that leading stocks are making lows of the day and that is something that you always watch out for. Do you get a sense that this is not one of your normal corrections or consolidation which gets bought into in one day? Do you think this market is now beginning to expand on the downside?

Gujral: Maybe expanding on the downside will need some sort of event or news flow. But, we have forgotten that markets move sideways a lot and chances are if leading stocks are not able to make fresh highs, then you cannot expect the weak stocks to take the market up. So we could spend a few weeks being sideways as well and nothing wrong with that. That will allow averages to catch up. That will allow people who have not participated to come in. If you go at this rate, by the end of the year you will be at 11,000. That cannot work out.

So, the market is planning to pause. Global markets are kind of now sideways not moving up with that sort of momentum, so possibly there could be corrections on a lot of these high flying stocks, the NBFCs, the Escorts, etc. Before the market decides to make a new high, we could easily be in this 9,450-9,500 to about 9,700.

Surabhi: What would your top bets be for next week?

Gujral: The idea should be to buy into strong stocks as they correct. ITC probably completed its correction today, so that is one of the first buys. At some point, ITC should get up to Rs 345. So strong stock correcting to 20-day moving average is the best place to buy them. Escorts can be accumulated as it hits 20-day moving average. Again, at some point, targets of Rs 800 look possible. Century Textiles is another one where the correction is over now and out there, we could see targets of Rs 1,250 in the next few weeks.

Anuj: What is your view on Fortis Healthcare? Will it cross Rs 200 in the next week?

Gujral: The good news is yesterday it had a large upside day. Today's bar is a little worry, but the good news is that it is very close to its 200-day moving average, so it hardly has a Rs 10 stop loss. You can keep Rs 180 as a stop loss. If the stock restarts its move, then ride it up to Rs 225-230. If it takes out Rs 180, the stock probably becomes fairly week. But it has corrected quite a bit and I would expect that it should restart its rally.

Surabhi: What are your views on Tata Power? It has not done too much in the last one year itself. It is not one of the high flyers that you were referring to earlier. What is your advice?

Gujral: Let me give you a very simple parameter. Stay miles away from power, infrastructure, high capex, these are not businesses for the retail investor. Retail investor needs simple businesses like consumer, NBFC, etc. Here, you pump in money and returns will come 15 years later. I do not think these are the kind of stocks you should be in. try to get into a consumer stock like Whirlpool, Hitachi Homes, etc. or an NBFC like Can Fin Homes, LIC Housing Finance, Bajaj Finance, these sort of stocks.

Anuj: What is your advice on Bharat Forge?

Gujral: Hold on with a stop loss around Rs 1,100 and we could get Rs 1,400 in a good market on Bharat Forge. It is a fairly decent stock given that the other auto ancillary which is Motherson Sumi Systems has been doing fairly well. Chances are even this one could move higher.
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