Expect another 5% rally in Q1FY25 for Indian markets, ahead of general elections: Andrew Holland

Despite this, he expressed confidence in the market's forthcoming rebound, attributing it to the expected decrease in interest rates. Holland maintained a positive outlook on valuations, foreseeing increased earnings as government and private capex initiatives begin influencing various sectors in 2024. Additionally, he anticipated stable oil and commodity prices to support or potentially enhance company margins in the future.

What do you make out of the Fed’s dovish stance? Last time, you said it's going to be a Santa Claus rally for December after the state election results. Do you think the Fed’s move has already been priced in?

Holland: Not really. I don't think anyone was expecting to play Santa Claus that much. It really is a big pivot actually, to be honest. I mean, I don't think anyone was—I mean, even when people were asking questions about what would change his (Fed Chair Jerome Powell) mind about bringing down interest rates next year, he was very clear that's going to happen.

I think the market really liked that. It's a bit like you have to do your last- minute shopping for Christmas. I think we're all trying to do that today because you've had that rally of 5 percent, which was on the back of good GDP growth for India, and obviously, the state elections.

But you could have that extra 5 percent value in the first quarter ahead of the general elections. Plus, now you know that interest rates are only going to head lower, and it's going to head lower in India as well. So, is it the first quarter or second quarter? We think it will be the first quarter. And that's what the markets will price in during the first quarter.

Do you think FIIs will come back into the market in a big way? Do you think IT stocks will start performing? What's your assessment?

Holland: No, it's going to be large-cap led. It'll be led by IT and Bank Nifty. These two sectors carry significant weight in the index, contributing to a sharp upward movement in the Nifty. Additionally, this could boost confidence among corporates in India, accelerating the capex cycle, heading into 2024.

In the short term, this trend could benefit metal stocks as well. These three sectors are expected to be the primary beneficiaries of Powell's stance, potentially resembling a dovish Santa Claus gift.

All stars have aligned for India. Macros are working in its favour, political uncertainty is behind us and there is a dovish stance from the US Federal Reserve. Here on, what is that one big trigger that you think can change the market's direction?

Holland: All the tailwinds are there. I think as we get towards the general election, the markets might start to think whether there would be any changes in capital gains tax. That's something we've all forgotten about. But obviously, we saw it in the kind of fixed-income market or the bond markets in terms of aligning tax rates.

This is something that the market might need to kind of think about. At the moment, we just enjoy what the market is giving us.

What's your take on third-quarter earnings?

Holland: I think they're going to be okay. I don't think there's going to be anyone knocking the ball out of the park. IT will continue to suffer. But you've got to look ahead now, and, say, in six months' time, where will we be? We're looking at lower interest rates, great for banks. We're looking at obviously some slowdown in the US, but that will bring down interest rates, so, good for tech. That's a tailwind for IT.

We usually like tech by about six months, in terms of performance, and we've had some great performances from tech in the US. Obviously, for metals, which I mentioned, you would have them, you know, the capex cycle starting and the banks' lower interest rates will take some of that pressure off the NIMs and deposit, kind of that deposits which every bank is competing for very, very aggressively, just to use that momentum. So that's good. That's what I would see in terms of the kind of themes that will play out over the next quarter.

Do you think the broader counterparts would now underperform larger counterparts here on? Do you think they are completely out of the way and one should now be focusing on themes like HRITIK, where you have stocks like HDFC, Reliance, Infosys, perhaps coming back in a big way?

Holland: This part of the rally will be large-cap led. Once the expectation of interest rate is going lower, capex cycle starts to pick up by private companies in India.

That's when you're going to get that small and midcaps doing catch-up again, if not overtaking the indices.

The index is something they all look at, but it's the themes underneath which will make you the most money. So again, the whole thing about experiences, travel, hotels, airlines, premiumisation in the beverage industry, all of these are going to continue to play out, along with the defence sector, renewables and the capex cycle. So, I think the index will lead in the beginning, but then you'll find a lot of great opportunities in the mid and small caps as well.

In a picture-perfect scenario, which are the factors that could be party -poopers?

Holland: So, what could happen is a few things. Obviously, geopolitical factors could be something that we're kind of a little bit complacent about at the moment -- not just what we see happening in Ukraine and in Israel, but maybe somewhere else.

I mentioned that there could be some kind of move towards aligning capital gains tax for equities, going forward. That would be something the market needs to think about. I suppose really what could take flows away from India, you would say India should get a lot of flows now, would be China doing some huge stimulus, which will change the sentiment back towards China. Those flows are going more towards China because it's a very cheap market compared to India.

We will get the flow, but maybe not what the market expects. That would be a bit of a dampener, I think, as we go into 2024. But we'll have to see if China does that. Those are the kind of, I would say, smaller negatives. At the moment, there's nothing I can see which will change the momentum for markets in the very short term because interest rates are coming down. It has been confirmed by the Federal Reserve, and we'll see what the European Central Bank (ECB) and the Bank of England say today. But I would have thought the message would be equally the same.

The kind of frenzy from the primary markets and the bunch of IPOs that are now lined up, perhaps, some at even at lofty valuations… is that also a reason to worry?

Holland: I think, in the past week or so, there have been, I don't know, six or seven block trades, QIPs, and then you've the IPOs. So the market was getting a little bit exhausted by a lot of issuance by companies or by private equity selling out. That has been kind of well-absorbed. It was just that kind of money that was holding back the market. It will give that extra fillip in terms of the interest rates.

But I think valuations are still decent. I'm thinking that earnings will start to rise, going into 2024, as the multiplier effect of government and private capex starts to play through many, many sectors. And with oil and other commodity prices remaining subdued, that should help the margins as well of companies or at least have margins stay where they are for the time being. So that's what I'm really thinking. I'm trying not to kind of think of too many negative things.