Andrew Holland of Avendus Cap Alt Strategies sees high valuations could be sustainable if earnings pick up. He likes private banks against PSU banks and feels GST could hit mid and small caps
Sounding a caution on the market, Andrew Holland, CEO of Avendus Cap Alt Strategies, said complacency in the market is very high at the moment. While France is off the table, issues in North Korea continue to linger.
“You will get bouts of volatility, which you haven’t seen in equity yet,” Holland told CNBC-TV18 in an interview.
Having said that, he is not very negative. “Valuations are a risk. But you can live with it if earnings see a pickup, which will happen in 2018 and not this year,” he said. He observed while global markets too had risen on liquidity, earnings of a few companies in developed markets were also good. "That was supporting the valuation there."
On a sector-specific basis, Holland is not looking to buy public sector undertaking (PSU) banks yet. “I don’t see value in PSU banks….it is not making sense to me now, unless ordinance is a bigger game changer,” he told the channel. He prefers private banks over PSUs.
Meanwhile, non-banking financial companies (NBFCs) are yet to see a pickup as yet problems from demonetisation still exist. “We haven’t seen a V-shaped recovery post demonetisation,” he said.
He likes consumer goods and construction companies as he is a big believer of affordable housing. Among midcaps, he does not have a broad-based approach as GST, a potential disruptor to the economy, will hit mid and small caps.
Below is the verbatim transcript of the interview.
Anuj: Since you have a long/short fund, what do you do in a market like this because it is making a bit of a mockery of valuations but the liquidity is supporting the markets?
A: You cannot find the momentum, that is for sure but what you can do is put on some hedges and at the moment we are around just over 50 percent hedged in our portfolio.
So we are not overly negative but obviously when you see global markets rising so much basically just on liquidity, although some of the fundamentals results coming from developed markets have been quite good and that is the kind of valuations there but this too much complacency, you see the volatility index (VIX) hit 9 earlier this week and when I look at that, I think about how many times the VIX has been under that kind of level – I was reading the other day when it has, which is a very few occasions, if you fast forward one year later, you will see the markets are down. So there is a lot of complacency around a lot of issues and maybe what we are seeing now in the commodities markets, not just oil but metals as well is telling you that some of the exuberance in some of the asset classes has been too much.
We are starting to see that some of the risks taken off the table. So maybe markets are going to be the latter part of that but we need to watch China, some of the noises coming from China in terms of tightening is quite concerning. So I am not overly negative on commodities, global growth will pick up but you are going to get these bouts in volatility.
Latha: A bunch of fund managers I spoke to are also worried about valuations at this point and couple of them were recommending going to long/short funds, that is what they are telling their high networth individuals (HNIs). Are you seeing that kind of demand for your fund?
A: We have launched the fund about a month and a half ago. We have already managed to raise Rs 500 crore so we are very pleased with that and obviously welcome our investors. So what we are seeing is as investors are finding that one, the yields on bonds, if you hold them for three years or plus are quite low and equity market valuations are high. So, a fund like ours which does not worry about whether markets go up, down or sideways we are trying to make our absolute positive returns, is finding a lot more favour with investors going forward.
Sonia: The government is now moving quickly as far as the non-performing asset (NPA) issue is concerned in the banking space. In fact, today the President has given the nod to the ordinance. How have you reacted to the news flow so far and do you think there is still a big story to play out here especially in some of the public sector undertaking (PSU) and corporate facing banks?
A: I thought share prices have played that out, but the devil is in the details, so I am going to have to wait for that. There could be disappointment or we could all be thinking that there is a further leg forward.
I still go back to whatever the details are, is that PSUs do take a big haircut. It is not just doing that, that is great and it will clean up the balance sheet, but it is how they then manage the bank going forward and that is where I still have doubts and question marks. So, as such, over many years, we like to rent these sectors, PSUs in particular, but we do not want to really own them yet and until there is a real fundamental shift in how they do business then I cannot bite the bullet, I am afraid.
Latha: But are you renting them now? And if yes, which ones, just the top, State Bank of India (SBI) types?
A: We mainly stuck to the private banks to be honest. We do not see the value in the PSU banks, they have had a great run, but at one time or one point, four times, it is not making sense to me. So, unless the ordinance is a bigger game changer than I am expecting then I would still go back to what are the managements going to do going forward.
Anuj: I know you will not talk stocks, but I need to ask you this because a couple of calls have worked for you. You are long on oil and gas. GAIL in particular is one of your top overweights and you are short on the small finance or non-banking finance company (NBFC) kind of names, you have always been. Ujjivan Financial Services is the one which is there in your shortlist. Your thoughts on both these spaces now?
A: Obviously, on the small lenders the demonetisation problems are still there. It does not seem to be picking up at the moment. So, there is a lot of problems in that sector at the moment, which are not seeing that V-shaped recovery that every hopes for. Oil and gas has really been a sector we have been looking at a little bit more closely and obviously, we have taken our view on which stocks we want to be bullish on.
We have not changed that much over the last few months in our thinking. I suppose the only area that we could become more excited about is the consumer goods sector, which we are biting our lips, but we are actually taking stocks on despite the valuations. So, it is the first time in many years that we have been a little bit more bullish on the consumer goods sector.
Sonia: So, you have been bullish on names like Asian Paints as well. Is this the way to play the lower crude theme?
A: No, it is helpful that crude has fallen, but that was not the main reason. We are big believers of the affordable housing sector and that really taking off and real estate as we have told you before is our dark horse for the year in terms of a sector. But as affordable housing takes off and as goods and services tax (GST) plays through, these are likely big beneficiaries within the consumer goods area and the stocks that we have in the portfolio are likely to be the big beneficiaries of that.
Latha: What do you think in terms of big caps and the midcaps itself? Do you think this year can continue to be dominated by midcaps?
A: It should well be. I am not trying to do a broad brush approach on midcaps because obviously, you have to look at the management. But I still think GST is a potential disruptor to the economy and that will hit midcaps and smallcaps more. So, whilst they had a great run, I do expect that this will be the one area where we will start to see the real companies emerge and the ones, which have just risen because of the ties that have been coming are probably the ones where you will see a lot more downside in the next 3-6 months.
That said, it is a domestic driven economy and going into 2018, where we do see the earnings growth pick up, a lot of these midcap stocks will continue to surprise us on the upside, not just in terms of share prices, but also in terms of earnings.
Anuj: So, what is the biggest risk for this market from here on? Do you think it is now just domestic and valuations or do you think there is a global risk as well?
A: Valuations obviously are a risk, but you can live with that if you think earnings are going to pick up which we do in 2018, not this year. The point I made before of complacency is really very high at the moment which means that the fix is where it is. Something changes to change that view, it cannot be that there is no risk around. France seems to be off the table, but North Korea is still there. It is still lingering.And China, I just wonder whether things are just turning down a little bit in terms of China's gross domestic product (GDP) growth and that is partly behind what we are seeing in the first downtick in metals and oils. Again, if that was the case then that could be the catalyst, which brings global markets down. But overall, I am not overly negative. Still our base case is that global growth will take off this year led by the US, then Europe and then Japan and that will be a good backdrop both, for our markets as well as global markets going forward.