India's shirt cleanest in EM but FM, RBI out of sync: Ambit

The recent moves to curb rupee will accelerate outflows from the Indian equity market, says Andrew Holland in an interview to CNBC-TV18.

Holland, who is CEO at Ambit Investment Advisors, said the steps taken by the Reserve Bank of India and the announcements by the finance minister on rate front reeks of policy mismatch.

Also read: See volatile FX, bond mkts; rupee to gain today says Macquarie
In the midst of all this, the interest rate sensitives will be most impacted. He believes interest rates will fall going forward, and that is the reason Ambit remains by India's side.
Holland is more bullish on the market than bearish and says, "India has for a long time now been wearing the cleanest shirt in the laundry basket and we have seen policy moves by other emerging markets." Below is the edited transcript of Holland’s interview to CNBC-TV18. Q: What do you make of the moves and does it change your view on stocks and the financial stocks in the near-term?
A: No, it hasn’t. I’d said earlier that we were with defensives. We never got swayed into the interest rate sensitives, but the next month or so, I think we are going to play out some of the problems that have been in the economy for sometime. Sometimes this kind of an event, which is like the straw that breaks the camel’s back, in terms of all the problems, is going to the real estate sector. This is going to impact the banks and I think one will then see what really is going to happen.
With everyone downgrading the economy, the emerging markets funds were thinking about how to attract money in the bond market. But, basically it is equity markets where one could see the outflows now. Just a few weeks ago the Finance Minister came around and said banks should cut interest rates and some of them did. So, there is a policy mismatch between what the Reserve Bank of India (RBI) is doing and what the Finance Minister wants, which is a bit worrisome. I think that needs to be kind of thought about and played out more openly between them.
I don’t know what the government is doing in terms of the reforms, but it doesn’t seem a desperate move because we are seeing other emerging economies increase interest rates. However, it is marked by a little bit of desperation to hold the currency where it is. Now that sounds very negative view.
I am actually feeling more positive about interest rates falling quite significantly and tumble down towards the end of the year because the economy is going to take this on the chin and at some point interest rates will have to fall.
I am thinking that in the next few weeks, as we see more carnage in the real estate and banking sector, that could be the time to make the switch from defensives to interest rate sensitives. Though it is not today, it is certainly coming. So, I think the next few weeks are going to be crucial for that. I am actually feeling more bullish than I am bearish, although I think the market will take it on the chin in the next few weeks.  Q: If you were a foreign investment manager sitting out somewhere would you be making that discerning call between India because of what you have seen overnight or would you rather not prefer this emerging market over any other in any case?
A: Actually, India has for a long time now been wearing the cleanest shirt in the laundry basket and we have seen policy moves by other emerging markets. So, we are still standing out of India, but I think it was standing out more for the fact that we expected interest rates to fall and therefore earnings to pick up rather than interest rates to be hiked and earnings to fall.
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On relative terms now, I think that one has to go back to the drawing board and do some numbers to see how India stacks up relatively. I suspect it will just take that edge of India being the cleanest shirt these days and that is why I am worried that one might see equity outflows, which will probably hurt the rupee in the short-term as well. So, the RBI is in a move which is equity-negative because it is hitting the parts of economy and the companies which really can't withstand an interest rate hike at the moment. Q: Where do people put their money now in India? It looks like every asset class is under some kind of fire?
A: Yes, it does actually. Gold has collapsed, real estate in its last leg. So, I think equities are the place to be. I think interest rates will tumble towards the back-end of the year and then equities would be the place to be. I just think it is going to be a bit of a short-term pain for everybody and as foreign institutional investors (FIIs) just might vote with their feet a little bit in the short-term. But if interest rates are coming down, then equities is a place to be and that is why I am getting more bullish. Hence, I think interest rate sensitive and the banking sector will be closely looked at. I am looking for a switch from defensives in the next two-three weeks. Q: By how much would you peg back your GDP expectations for this current year and what kind of levels do you see the Nifty adjusting to as we realise what GDP could be?
A: I think this could knock off between 0.2-0.3 percent from anyone's GDP forecast, because companies will just standstill now as they were before. So, it is not going to be good for the economy. The Food Security Bill and fiscal deficit are not going to be another constrain on the fiscal.
The lowest level I can see for Nifty is 5500. If there is anything more within any other EMs, then obviously it could go below that. I do not think there is any compelling reason to come in and buy India at the moment which is what we were trying to think of how to attract foreign investors.
They put a lot of money in, and have lost a lot of money in the currency market and the question is, is this enough to stem the outflows and the currency not depreciating anymore given that crude oil prices are moving higher and without doubt, when Ben Bernanke speaks this week, he will be talking about tapering.
Tapering will happen in the US. All we have been debating in the past few weeks is when will interest rates be increased in the US. He has really said that that is not going to happen for sometime. So, it is going to be tapering with accommodative bond purchases at the same time. But for sure, the dollar is going stronger and so is crude oil and that is the message which unfortunately the RBI governor has seen, but what he is doing is trying to defend a currency which will naturally depreciate anyway against a stronger dollar.

Q: How far back would you push any significant recovery for equities now? On this growth parameter expectations were that FY14 would be better, clearly it is not. Some estimates for FY15 are also being brought down to sub-7 percent. How much longer do you think this period of pain for equities is going to last?
A: I wish we had not had that much pain. Despite all our problems, I think the market is pretty flat for the year in rupee terms. It is only in dollar terms where one has really taken a big hit and infact, we have probably outperformed most of the other EMs.
India has been the cleanest shirt in the laundry basket and that is what we have been. The foreign institutional investors (FII) might look to India as maybe their funding for any redemptions that they get from other EMs. I think the pain is probably 5500 on just what India is doing alone and that does not take into account any kind of misfiring or missteps by other EM economies which could take the market lower. I am increasingly more bullish now about the Indian market and particularly making that switch from defensives to interest rate sensitives is not today, it is probably not next week, but it is certainly within the next month or so.