Andrew Holland bets on pharma, says GST is already priced in

We are not playing the FMCG space, he said. At this point, the liquidity has pushed the valuations too high; we still have to wait for the monsoons to finish.

He is bullish on private banks and NBFCs. Two-wheelers catch his fancy, not four-wheelers so much.Below is the transcript of Anu Jain and Andrew Holland's interview toCNBC-TV18's Reema Tendulkar and Anuj Singhal.Anuj: I know that you have been surprised by the ferocity of rally post Brexit but can we argue against the sheer weight of money and the kind of run that we have seen in all equity markets, not just India? Holland: No, you can’t; it is not just all equity markets, it is all assets. Safe haven assets like gold, yen and US dollar, everything is going up. We have been here before, liquidity driven markets, there is something that will burst that bubble at some point. Don’t know what it will be, don’t know when it will be but something will. So, you are right in what you have been saying, we just have to kind of look at the risk side of it and how you can protect for when that day happens.Maybe it is partly to do with what Japan does or doesn’t do, they came out with monetary policy which wasn’t taken so well by the markets, maybe the fiscal package next week will again get people excited again. However, there is still a lot going out in terms of Europe, all the figures coming out of Europe are looking down and that is part of the problem. Reema: What should be the strategy we should adopt? The strategy which has worked up until now is chase earnings growth which is why Eicher Motors is now at Rs 22,000 and Bajaj Finance is now at Rs 10,000 irrespective of valuations. From here on, should we continue with that strategy, buy these stocks even if they appear expensive or is it time to look at value picks also? Holland: It is two different scenarios. Even value picks are going up as well. What value picks are there when you are over 19 times one year forward. There is very little value out there which is why everyone has been looking down to smallcaps and to the midcaps as well. So, I think that is where the money has been trying to try and get some extra money from the markets. It is a strategy which at some point will hurt you so if you are holding them, great. Would we chase them? Not really, not at this level. Anuj: In your fund, are you increasing your hedges, are you increasing short positions or are you not doing that either because the liquidity is just way too strong? Holland: It is very difficult to go short because all the stocks are moving up, whichever ones you think, even poor results. If you take say Axis Bank results, they were very poor but the stock is higher because you are getting ETF money coming in and that is buying the index and that is what is pushing up the PEs. What we have been doing is the strategy which we employed before Brexit which is to kind of keep buying the Puts, keep buying the protection for that day when markets do take the turmoil, have at least some protection for the funds but we are not going individual stock shorts as we were say six months ago. It is just not paying. Reema: Goods and services tax (GST) is listed for passage as well as consideration in the Rajya Sabha next week. There was one opinion which said that perhaps we might top out the day the GST Bill is passed. Do you concur with that, do you think it is already in the price? Holland: It is very much in the price. I still don’t know what form it is going to come in and I think we all know it is not going to happen for another year in terms of deliverables. It is not going to have a big impact on gross domestic product (GDP). So, it is really a sentimental reforms moving forward, India moving forward type of event. So, it is not really going to boost earnings overnight. It is only certain sectors and companies which benefit from it and that will still take time. I think let us not hide away from the fact that this is liquidity driven market, any good news is seen as very good news and any bad news is just seen as good news and that is where we are at this point. Anuj: The market is still going to dance to global cues. In that sense, do you think something like an Infosys for example, or Dr Reddys for example, some of the stocks which have fallen because of earnings and are now available 15-20 percent cheaper, they will also participate now because some of the ETF money might now want to chase some of the underperformers? Holland: ETFs will anyway have to buy those as part of the index. However, would I be looking at those two companies? The IT sector you know I don’t like and I am light for a long time, so, there is nothing going to change the fundamental outlook for the IT companies. So, in a rising tide, they will all kind of move at some point but fundamentally would you want to be in these stocks when markets fall? The answer is no. Anuj: What about pharmaceutical, Dr Reddys is a different issue but rest of the pharmaceutical has picked up from the recent lows? Holland: When we spoke last time about a month and a half ago, after all those FDA notices, value is there and we started to look at the sector more closely. So, we have been increasing our holdings across the board in pharmaceutical and it has paid up very nicely if I compare it to what is happening in IT._PAGEBREAK_Reema: How are you playing the FMCG space now because on one hand Hindustan Unilever's volume growth disappointed the street but you have an Asian Paints which is at record highs on the back of a very strong double digit volume growth in the decorative business, what is the strategy we should adopt when you want to play the FMCG pack?Holland: We are just not playing the FMCG. You are going to get pops on results and so forth but how much can they grow from here? I just think this is ETF money and this is what we actually could have been blinded by, it is just pushing prices of all the quality companies. There is nothing wrong with that but PEs are getting to a point where there is no real reason to be in those stocks on a very shorter term basis which you have to look at as well.Anuj: The other point is that the market looks a bit overheated but if you see year to date dollar terms may be we are still underperforming. It has been that kind of an year.  Holland: If you look over a year we are actually still lower than we were a year ago. People have made money more recently but if you took from an year ago you have really not made that much money in terms of indexwise. However that doesn't mean that you are going to keep going up because you haven’t made money over one year.Anuj: Last year your big call was that at some point the index will go to 10000. What has made you change that basic thesis that at some point may be during this year or during first half of next year the index should not be at 10000?Holland: I am not saying that we shouldn't be, I am just saying at this moment  liquidity has pushed the valuations too high. We still have to wait for the monsoons to finish and it is getting a little bit patchy again from what I can work out. There is 7th pay commission, people have to start spending, so that is the big kicker for earnings, we know that. However does that mean earnings go from our base case at the moment of 5-10 percent to 10-15 percent? or does it go all the way to 20 percent? I don't think it goes to 20 percent this year, may be the year after and that is what will take the market higher. Plus we will probably see some rate cuts as well by the Reserve Bank of India (RBI) in the next few months.Reema: You said you don't like IT, FMCG you don't seem to be very interested, you won't be chasing some of these big performers like Bajaj Finance and Eicher Motors, what would you recommend a buy on in terms of themes or sectors at current levels?Holland: We have kept to our basics which are the private banks. We have held the NBFCs which we had for some time. We have taken a little bit of money off the table but not so much because we believe in the long term. We have added pharma and some autos which we have had for some time as well - two wheelers more than four wheelers and that has paid off for us. So, we are keeping with what we have rather than saying there is a new theme coming along in the sectors because the valuations are just not compelling, the risk is too high now.Reema: So, you have an increased long positions?Holland: We have increased over the past month but we are not looking to incrementally kind of increase at the moment.Anuj: Two wheelers you said, why not four wheelers? Maruti in the past has been one of your favourite stocks. It is back to its previous highs and last quarter's numbers have proven that the company may be has moved beyond just worrying about Yen. We had the management saying that 2-3 new launches every year. So, either Maruti or some of the other four wheeler names?Holland: Maruti actually did lot better than I expected. We did expect those headwinds to come from the Yen, maybe it is still to play out a little bit more and that quarter didn’t really fully reflect the kind of move of the Yen. So I think that is still a headwind for them but great results and they are going to launch 2-3 new cars a year from what they are saying. So, they will continue to be a leader. However I think there is value more in the two wheelers rather than the four wheelers at the moment.Reema: We have seen some good earnings from a couple of these media players like Zee Entertainment or a Dish TV as well, do you like them?Holland: Not a sector we have been involved in. It has done great actually and maybe we should have looked at it more. What we expected was maybe that the FMCG companies under their own pressure would maybe cut down their advertising spend which did not really happen. So, maybe they are still after getting market share. Interestingly Dabur's result show that they were cutting down on expenditure. So, maybe this is still to come yet.Anuj: What comes first 9000 on index or back to 8000?Holland: If liquidity continues as it is then we could continue to go higher and we will all sit here again in a few weeks time saying valuations are too high. The problem is that you don't know what or when that bubble will burst and what will cause that but once it does we are all in for a rude shock.Anuj: If and when it does, what is the downside for this market?Holland: It depends what bursts the bubble, that is the key. I think it is going to be in the bond market and I think it is going to be again from emerging markets somewhere. So, that could at least be a 5 percent or it could be worse depending on what happens._PAGEBREAK_Anuj: The fundamental analyst will talk about the bubble creation, but from technical point of view, this really has been a market in complete control of the bulls. When you look at some of the charts and when you look at the overall market psyche, what is that telling you? Do we have much higher levels to come in the future? Jain: Yes, it has been a run which has been unexpected especially after having seen 6,800 and Brexit nobody would have reckoned that we would be closer to 8,700 in this month. What it is now throwing up is a pan which would look differently for a trader and probably differently for somebody who is holding a portfolio in cash. So, we are looking at both the strategies quite differently right now. What I heard Andrew speak and I heard you have that conversation was risk management, I think that is the call of the day because if you are a trader, your stop losses is what has to be very keen right now. So if you are looking at the Nifty at these current levels, I think till you are holding 8,560-8,570, there is a good chance that 8,720 where there is resistance now can be crossed.

We always have that event of the GST and that could take you up closer to 8,780. However, these are levels where there are multiple resistances, it is not going to be easy to cross them and at the same time there is no negative bias which would make you take a preemptive short. So, I would just keep a stop loss of 8,570 on the Nifty. If one were to see at the contribution, it is the Bank Nifty which has kind of hold it up and that has taken you in this last round from 18,500 odd to 19,200 on the futures today morning which it tested which is again a crucial level and a crucial resistance. What is the first sign which is giving me a signal that this rally is towards the end is the way the PSU banks have started petering out because that is what has over the last couple of weeks, couple of months led this rally. With the results coming out in Canara Bank, Syndicate Bank and especially in Punjab National Bank (PNB) yesterday, we saw longs getting culled; we saw moves from Rs 130 to Rs 133 down to 3-4 percent on PNB between yesterday and today. So, these are signs of momentum running out in particular sector.Until and unless there is a very strong rotation into some other sector which is not visible as of now, this will start getting tired. As I heard Reema also say that probably GST day, yes, it could very well be that. So, for a person who is long and is a trader, I would say keep your stop losses. However, for clients who are holding long portfolios, we are asking them to take some cash off the table. Reema: From an investor point of view, we have not seen a very deep correction. In case there is a correction, where would you then place the stop loss, would it still be around that 8,570 mark? For a longer term investor what could be the extent of the correction if it comes through? Jain: The Nifty has levels and support levels which keep testing, retesting and breaking and then you know how the move is going to be. So, as I said, the immediate first signal of a weak or a tiring market would be when it breaks 8,560-8,570. Once it breaks that the next level is closer to 8,380 and then it would be closer to 8,200. So, if this were to break 8,600, you could straight move to 8,200 around which is roughly about 450 points. If you look at that in terms of a marginal correction, it is still about 5-6 percent. It could get deeper because if this is a liquidity driven rise, it would be a liquidity driven fall as well. In that case if you look at very long-term and strong basis, 7,900-7,950 is where I would see the very strong basis come up where people would start pegging in again into the market. So basically I would say that one has to be taking money off, if one is an investor. We have done that for various stocks which are good quality but which have kind of moved beyond their valuations.Anuj: Talking about good quality stocks and which have moved beyond valuations, three names stand out, Asian Paints, Eicher Motors and Bajaj Finance, how would you approach them?Jain: All three differently - Eicher we were really not holding. So, we have not really got it in our portfolio. Clients are holding them, we are basically telling them to hold with a stop loss of Rs 21000.Asian Paints we have been holding in our portfolio, we continue to advice. In fact if there is a dip because of the market going down, we have seen that big move come post results today, it retraced back, it can retrace back to about Rs 1050-1060, I think at those levels we would probably add I into the stock. So, on that there is a completely different strategy because we are completely bought into the theory of consumption basically taking the markets over for the next one year. Valuations are steep but we think that this will probably continue to be expensive.Bajaj Finance we are taking some money off the table. It is a very good stock but extremely expensive. There is better quality probably, better valuations available in some of the other NBFCs and since we have whole bank Nifty and financials outperforming to such an extent that it is over powering our portfolio, there we have started taking money off.Reema: We have also seen some big moves in couple of these non Nifty names like an Escorts as well as Dish TV over the week. What are the charts telling you and anything else that you would like to highlight just to trade?Jain: If you look at Dish TV and Zee, you are seeing a spurt in media come in. Even Sun TV for that matter from about Rs 370 it zoomed to about Rs 450 odd. So, it is a move for the whole sector. You will probably see TV18 and the other media stocks also kind of move in for that fact. I think for Dish TV there is a potential to go upto about Rs 111-112. It has stayed and consolidated in the Rs 90-97 levels. I would essentially say that keep a stop loss of Rs 96, it can hit Rs 112, not that we are advising a buy for investors right now but for traders it has a positive bias.For any of the other stocks, Zee Entertainment is at a 52-week high, you can hold it, there could possibly be Rs 535-540. The stop loss should be about Rs 480 around there. I think there could be more momentum coming in Sun TV also. So, probably that could give you another 5-6 percent. However these are momentum plays and at these levels probably it doesn't make sense to get an investor into the stock.