Fisc cliff not worrying mkts; may rise 15% in 2013: Ambit

Andrew Holland of Ambit Capital believes a solution to the US fiscal cliff could be around the corner. According to him, there may be a resolution but he is not sure of its form and the markets at the moment indicate that there is not much to worry about.

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Going into 2013, Holland feels the markets are set for all-time highs and may even book gains of around 15 percent. "We are not looking for a kind of a real massive increase in the market, but we are saying that we do not expect PE expansion rather, we think that the market will move up in line with earnings growth and that will be about 15 percent. We will have new all-time highs next year," he added. Here is the edited transcript of the interview on CNBC-TV18. Q: How do you reckon it is going to move in the tail-end, is there going to be some kind of vision statement, resolution or is all this confusion going to get postponed to the next year?
A: Hopefully not in the next year. I mean they are calling everyone in on Sunday to try and get a resolution but the markets are telling us that maybe a resolution is around the corner. Otherwise, I think we would have seen some kind of a sale-off globally but we have not been seeing that.
We are far too complacent about what might happen or that the resolution will be there. We are in the camp that the resolution will come through, but in what form that will be, I am not quite sure and whether it is going to slip into the next year, I am not quite sure either. But, the markets are telling me at the moment that there is nothing too much to worry about. Q: The benchmark has been quite high after what 2012 has done in terms of an equity market movement. How are you approaching 2013? Do you think we could replicate the move of 2012 in any form or fashion?
A: I think we will continue to build on the gains of this year. We are not looking for a kind of a real massive increase in the market, but we are saying that we do not expect PE expansion rather, we think that the market will move up in line with earnings growth and that will be about 15 percent. We will have new all-time highs next year. Although, 15 percent sounds a bit muted after this year, I think that will be a good follow-through given that there are still a lot of headwinds not just for India, but globally going forward as well. Q: When you say markets will move in line with earnings growth, do you think the earnings cycle has bottomed out and will we see EPS growth enough to drive the next leg of this rally?
A: I think we are very close to the bottom, if not having reached the bottom. We saw it in the last quarter results which were a little bit better than expected and we are starting to see small upgrades by brokers now. So that is good news.
If the interest rate cycle starts to come down as everyone is expecting by 100 bps next year and throw into that an economy recovering to say 6.5 percent growth for 2013-14, then you will see earnings start to pick up in the second half of the year. I think 15 percent is what we are looking at and I think that is what propelled the market by around the same amount.
_PAGEBREAK_ Q: If there is protracted confusion on what the actual outcome maybe, how bad do you think it is going to get for US markets of course, but for extension markets like us?
A: It is very simple. If the fiscal cliff is worst than we expect, then the consumer in the US is going to put his hands back in his pockets because he has got less money to spend. That is going to impact Europe, China, Japan, Korea. So the risk of trade will come through very, very quickly. I know we will all be sitting around, working out whether the earnings growth is going to be there, not just for India but globally.
I think that is the risk for all markets at the moment. But, as I say, even we are too complacent on the markets at the moment. Q: Any greater vulnerability for India given the nature of the flows we have been pulling which seems to have been mostly Exchange Traded Funds (ETFs)?
A: With risk off trade you could see outflows and that would be a shock for most of us. Given that the retail investor in India is still pulling money out of the market, there is going to be a one-way trade and that is going to be selling. You cannot escape a global event on portion.
India has attracted a lot of inflows because it has been the kind of cleanest shirt in the laundry basket, but there is only so much you are going to have of that. I am not saying it is going to be a big fall, but you would see some outflows and that is for sure. Q: What kind of downside risk would you attach to the market in the event that things do not go global markets' way in terms of an easy or clean resolution to the fiscal cliff situation? Does it amount to a 10 percent cut for us or do you think it will be limited because of the valuation support our market has?
A: I think it will be limited. I think it will be more like 5 percent from here. It really depends on what the global investors are doing and how nervous they are feeling about the events in the US and how that could affect Europe. I think the one unknown is really how investors will react to it.
But, I would say given what you said, is that the valuation support is there for the Indian markets. I think 5 percent from here would be a kind of worst case scenario. From what I can see at the moment it is very difficult to predict these things, but it is not my base case at the moment and that is for sure. Q: If you are constructive on the year that comes up, how should one really be approaching it in terms of sectors?
A: We have not really changed our strategy. We have not switched as a lot of people were kind of alluding to earlier in terms of going straight into defensives to the kind of high beta interest rate sensitives. We have been picking up names selectively and we will continue to do so. But, we do not think that shift is yet to be happen.
That said what you could see in January is the fiscal cliff may be resolved. I think you could see a wave of buying into equities because obviously the US economy is starting to show signs of life. Europe will continue to bumble along for the next few quarters without any kind of risk in the very short-term and obviously we have got a new leadership in China. We still have to hear their plans going forward, but we expect the plans to be more towards increasing GDP growth in China.
I think a convolution of good news could help markets. Of course we will focus very quickly towards the budget here in India and I think we will all be hoping for a not too populist budget but, also expect some reforms thrown in. I think the first quarter could be quite good.
My concerns, if I look a little bit longer, would be more towards the summer months of 2013. We have elections in Germany in September and I just wonder what Chancellor Merkel will do ahead of those elections. What kind of hard stand she will take within the European Union could scare us a little bit in the summer months. So I think the first quarter should be good, but I am not so sure about the second quarter towards the summer.
_PAGEBREAK_ Q: Perversely do you think India will be a great place to put in money? The kind of flows that we have gotten in the last one month, about Rs 25,000 crore or so, do you see the flows situation pick up in the year 2013 as well?
A: I think what we will see is obviously what we have been seeing in the past few months since pick up of issuance by corporates. So whilst you might see another USD 10 to 15 billion of net inflows into Indian markets, a lot of this will be absorbed by either government issues or issues by corporates to start shoring up the balance sheets and the next round of expansion.
I am not sure if the flows will be sufficient enough to push markets considerably higher after three or four months of issuance. But, the interesting thing is what I alluded to before and it is the retail participation as we all know has been very poor. If you look at the Shanghai index, obviously we are seeing virtually a fall this year again, but if you look at the MSCI China Index it is up like 18 to 19 percent. It is following a similar pattern.
Somehow we have to get retail investors back into this market and I think as we get towards new highs, I think that will propel the markets in the second half of the year. I would not necessarily say it is going to be FII flows that push the markets. It could well be retail flows this year. That could be the new trend. Q: There has been a lot of interest around how the Yen has been moving again and we know what liquidity from that region can do for markets like us. Are you hearing of anything in terms of incremental liquidity either being raised or being routed towards markets like India from the far east?
A: Not yet. I am hearing that more and more as well. The Yen carry trade is starting to do the rounds. It is great if it does. I do not think we should bank in it though. For the first time we are seeing the Japanese market moving upwards in a considerable fashion.
I think for 12 consecutive days it has been moving up, so that is a record for it. Let us hope it continues because that would help flows into India. But, I do not think we should be banking on the kind of flows from Japan just yet. Q: The suggestion seems to be that the next couple of weeks may not be about risk aversion, but risk rotation. How would you translate that into how you approach our own market? Have you been churning your portfolio around a lot?
A: No, not really. As I said we have kept our defensives. We are quite happy with the stocks there. It might not be a great relative performer, but we feel that you still need to have a bit of safety in these kind of markets. I think what we are trying to do is pick out the winners from some of the interest rate sensitive sectors, the real estate and the infrastructure sectors where we are starting to build our positions.
But, as I have said, I am not making up big shifts from defensives into rate sensitives, infrastructure, high indebted companies and high betas. I think we can wait for that one. So we are looking for strong companies who can continue to grow their earnings and hopefully, a lot quicker as the economy starts recovering in the middle of 2013. That is what we are doing. To be honest, there is no real major shift at the moment. Q: In two weeks from now we will start talking about the IT stocks and the earnings over there. How would you approach those names and the kind of concerns that we have seen both with respect to fundamentals as well as with respect to the stock prices?
A: I do not think fundamentals are going to improve significantly. I think the problem with the fiscal cliff in the US is that it has delayed corporates’ moves either to expand their businesses, to think about making decisions until they know what is going to happen and I think that is what we are hearing from Infosys and the likes that decision making is very slow. That could change.
Obviously, it could be more optimistic once policymakers go ahead with the policies and that could unleash a lot of spending for the US corporates who are sitting on trillions of cash. So there is some light at the end of the tunnel. But, at the moment that tunnel gets longer instead of getting shorter.
_PAGEBREAK_ Q: Coming back to the sectoral approach, the first phase of this ongoing bull run was dominated by many of these consumer stocks, both staples and discretionary stocks. Do you think the second phase would move onto some of the risky bets like you pointed out, maybe interest rate sensitives, even some of the capital goods names that have been sulking for a while?
A: Definitely. Let me put this scenario to you. The fiscal cliff is resolved and we are all happy about it. You will see the risk on rally continue in January and February for us in terms of our expectations for the budget and there is going to be high beta stocks and that is what happened if you remember in October-November.
We are still of the view that it is not that time to be owning these stocks. We would rather kind of rent them for the rise and then take profits as and when we need to. I think if you look at some of the high beta stocks, some of those stocks like Lanco, GMR, GVK, all of them rose very quickly and then came back to the levels they were prior to the run up in the market.
I think you have to be hugely convinced that the company is doing something towards restructuring of its debt or the business prospects for those companies is improving significantly and I do not think we are there yet. If it is going to be a multibagger over a two year period, if I am buying it 20 percent higher, then it is okay. Q: Given the scenario that you just painted, what do you think the topography of next year will be like? Does it seem likely that within the first two or three months with the budget, US fiscal cliff, some relief from the Reserve Bank, that is when we have a shot at a new high after which the market may actually flatten out considerably or do you think it is going to be a trading market where we will get these ups and downs through the year?
A: It is a good question. I would probably go with the markets trying to hit new highs in the first quarter of the year and I think without doubt it would be led by the banking sector and that will include PSU banks as well. That would be very closely followed by real estate, high beta, high debt companies, companies with credible management and so forth.
 
I think you will have a good run across all sectors and that will leave out the defensives. But, then as I said before, coming to those summer months I am just worried that we might see a little bit more rhetoric around the German elections and that could spook us all a little bit about Europe. It could well be a move towards new highs, settle down and then during summer months we can see some correction. But, at the end of the year it will be around 15 percent which is in line with earnings growth. So you might have pockets or periods where the markets will be weak and that is fine. Q: This morning there is a lot of excitement around the oil and gas bracket. How optimistic are you about policy action going into next year, whether it is on oil reform or any other front? Do you think it is going to be a big policy year as well?
A: I hope it is a big policy year because it has been a great thing for all the market confidence and hopefully, the government will continue to push through reforms even if they are difficult. Reliance is an interesting stock because all the bad news is there, we all know what the bad news is and thankfully the company is actually doing a buyback. But the game has always been that Reliance wants a higher gas price and that sounds as though it is coming more and more from what you hear from the government and the Prime Minister yesterday.
If you get a gas price increase then this stock will move up very significantly and that could be another trigger for the markets. I am not saying I would go into the other oil marketing companies yet, but something like Reliance where a lot of bad news is, everyone knows it could be a surprise feature for 2013 and I hope so. Q: In hindsight midcaps had a much better year than the frontliners. You will get to hear that from a lot of mutual fund experts as well as to how midcap funds have yielded better returns. Are there any spaces that you would be interested in as we head into 2013 purely in the midcap bracket?
A: There are lots of interesting midcap stories around. Again I think you have to be careful. If you look at 2011, I am sure all those midcaps were stronger or bigger underperformers than the main index. So it is okay to talk one year, but you have to look over a longer period.
But, we are starting to look at some of the midcaps. We have been in the IT sector. Throughout 2012 we have been in the midcap side of the sector rather than the large cap. We are looking at new areas with textile industry starting to interest us a little bit, partly because China is now buying yarn from India, not cotton and that is a new trend.
We like the Starbucks story, we like the Tata Global Services story and Tata Chemicals. There are lots of midcap companies out there, but I think you would have looked at each one individually and look at its prospects within its own industry. I am not saying that have a basket of midcaps, but have a very concentrated basket of sorts which you feel will be larger companies over the next few years because of dynamics within their own industry and because the management is good.