Mkt liquidity-driven; will short on every rise: Ambit Cap

Holland says that Ambit Capital’s strategy will be to short equities on every rise going forward.

Below is the edited transcriot of the interview. Also watch the accompanying video.

Q: Is this one more of those bear market pull backs or is something changing in the environment?

A: I think you have hit the nail on the head. It is all about liquidity. Over the years, we talked about how difficult it is to gauge fundamentals in a liquidity-driven market. So your mind drifts back to 2009 when we came into the year very negative, and you just had liquidity-driven markets which propelled everything globally.

I think this time around, when you are throwing money into the markets, we have hindsight now, the capability of looking at what happened because of that, and all we saw was near commodity prices including oil going higher and that will hurt not just India but other global economies too. So that kind of a cannot pay off to this trade as well.

My sense is that the European Union or the ECB is obviously giving the banks a lot of liquidity. That’s helping bond yields. But the problems haven’t gone away. You can sweep them under the carpet, you can keep trying, but I think this time around, I think the West is a little bit more wary than they were in 2009.

If you look at the US bank stocks in 2011, they are all down 50-60% if not more. A lot of those problems were over for those banks after the injection in 2009 and 2010. So I don’t think QE1-3 or whatever it is going to do for Europe, will get us away from the big problem.

I am enjoying the ride while it lasts, but I don’t expect it to last too long. The problem is that when the liquidity turns off, as we have seen before, markets come off very quickly. So you have got to be very brave to chase this market at the moment.

Q: So tactically what would you do with the market right now because we have had a pretty sharp rally on stocks and on the market itself in the first few weeks? Would you start selling or would you hold on for a bit?

A: I have actually started to short the market from here. I think it has had a great run. All global markets are looking overbought, including India. So you will get some pull back. What bad news will be that there is a whole host of things you can think of, but it is something that’s going to emanate even from Europe.

Nonetheless, increasingly I get more and more worried about China, how its prices are falling very swiftly and that could be the shock to global growth this year… overall talks about the soft landing and how well they managed the economy.

Sometimes when things start going down, it’s very difficult to pull sentiment back. So I think China is one country I would be keeping my eye on at the moment for more negative news. The stock market has really not performed this year despite what we have seen in the global markets.

Q: So do you see a new low being formed at some point in 2012 because there has been some hope after this rally that at 4500 Nifty we will put in some kind of a bottom. Would you say that we don’t have a secure bottom in there?

A: In the worst-case scenario which will obviously include difficulties in Europe and something happening in China, I could easily kind of argue of a Sensex target of 12,000 on the downside. Equally, if you look at the more positive side of liquidity, China being okay, European Union muddling through, US continuing to rise in terms of the economic growth, you could easily look at 20,000.

So I think liquidity at the moment is foreseeing some of the fundamentals off the table and that’s still where I think the shock could be on the downside in the shorter-term. But longer term, I have no promises where India is and where it will be. Nonetheless, I think we are getting side-trapped by liquidity at the moment, and that’s my concern.

Q: What’s your sense of how the market negotiates this period in the run up to the Union Budget?

A: The consensus view is that the budget delivers some form of sops for industries as usual. We have a run before that, and then after the elections, everything is put on fast track. But I am not so sure that will happen. It’s a little bit like the power companies meeting with the Prime Minister, or we get yet another committee and 90 days later we might find out what’s really going to happen. The action is now; it is not 90 days later. So I think it could be more or the same.

I have always been surprised by the government. In 2010, they were doing quite a lot of reforms and then obviously after the 2G scam, they have really kind of done nothing since. So it’s a very poor performance.

I am not seeing any kind of a big make over after the UP elections. I am not going to hold on to my breath in terms of this going to be a great move for the market. I think it is still going to be very political, it will be very difficult. A lot of reforms that we have been hoping for, for years, all of a sudden come back on the table. I am sorry, I am a little bit more cautious than that. They do have to do a lot, we know that. They haven’t done a lot for a long time. So optimistically yes, but in reality I think no.

Q: If your call is that it’s time to go short on the market again, then how are you approaching some of these high beta sectors that have had powerful rallies - infrastructure for instance?

A: The great thing about liquidity is it doesn’t distinguish between good sectors and good stocks and bad sectors. So everything gets worked up with the same pressure in terms of stock prices. I can’t see that BHEL, L&T - the fundamentals have changed so much that it has warranted the share price rise. No new orders are coming through for these companies. If you just rely on execution for these companies, they always failed and disappoint miserably. I think that’s going to be the case.
So I’ll tell you at the very beginning, liquidity will mash some of these problems but at some point they will come under weather and I think that’s when the markets will obviously fundamentally start to price that back in. We will then see share prices come up. So I just wouldn’t be chasing this market. I feel very nervous when it is liquidity-driven because fundamentals just don’t matter.