Andrew Holland of Ambit expects Maruti's margins to expand going forward and is also bullish on select auto ancillary stocks.
The downtrend in global equities may continue till the macro environment in China shows signs of imporvement, feels Andrew Holland of Ambit Investment Advisors.
In an interview to CNBC-TV18, Holland says he prefers large caps in the pharma space.
According to him, Reliance Industries could lead the market higher once the next round of uptrend starts. (Disclosure: RIL is owner of Network18, which owns and publishes moneycontrol.com)
Holland expects Maruti's margins to expand going forward and is also bullish on select auto ancillary stocks.
He says the RBI has room to cut interest rates by 50 basis points.
Below is the transcript of Andrew Holland's interview with Anuj Singhal and Ekta Batra on CNBC-TV18.
Anuj: I am looking at the performance of your Ambit Alpha Fund and in the month of August when the Nifty was down 6.5 percent, you managed to deliver half a percent positive returns, so how did you do that? Secondly, you had 46 percent unusually high cash levels and very high short positions as well 22 percent, would you look to change that now that we have seen so much damage to stock prices?
A: Not really because we keep a very high cash level. We will wait to see what comes out from China over the next week or so and even if we missed the first 2-3 percent of the market rise, that is okay because on an absolutely positive return fund, I am not after chasing any relative index. So we can use cash to protect the funds in capital and that is what we have been doing. It has been a difficult market as we all know but protecting capital is first thing on our minds.
A: HDFC Bank we believe is going to be the big winner from the growth in the India story as we go forward. Obviously, we think its moves recently to reduce rates for mortgages are going to again give it a lead in the market place. Yes Bank and ICICI Bank are probably laggards in the banking sector in what we are seeing as more choppy markets.
Ekta: I was quite intrigued by Lupin as well, what is your rationale for being short on Lupin and anything besides what you have your top five positions in that you like within the pharmaceutical space, there are a lot of bullish calls for example coming in on the likes of Cipla now?
A: If you look at the whole portfolio, there is obviously some hedging that we do with certain names. So don’t just look at it being a single short where we are expecting the prices to fall, it is a hedge as well against our long only portfolio. US FDA rules just keep changing and one night we are okay, the next day you got some ruling so it is not a sector we feel wholly comfortable in but it is a place to hide in these kind of markets.
Anuj: When we last met, we were discussing this issue of what China would do next in terms of fiscal support. We have seen quite a bit of monetary steps from China but do you think that still remains a big risk for the market or do you think that remains a factor that can lead to the market sentiment changing overall and would you put your money on Chinese market bottoming out and in turn that leading to a bit of a relief rally for global equity markets?
A: Just to explain that because if you go back to say this time last year when oil prices were around the same level, many people were saying there is a supply problem not a demand problem particularly for commodity prices. What we have seen in the past month or so is that complacency about China turning out to somewhat fair about how much the downturn can be. So we think that has played out or will thereabouts but what the market wants in my view, is that it wants some fiscal stimulus by China to steady the economy and I think if we get that then market could move higher from here.
I think until we get that, the markets will keep testing the downside until it gets what it wants. We will see in the next week or so with a lot of the Chinese data coming out maybe we will see that stimulus to help both the Chinese economy but also to the stock market and that would probably form the bottom today once that announcement is made.
Ekta: How much of a trigger or maybe a catalyst of returns would be say the Reserve Bank of India (RBI) policy and maybe another 25 basis points (bps) in terms of cuts?
A: I think the more important factor is China but let us say China if they do some fiscal stimulus then the RBI, if you think about it -- even the 75 bps of cut that we have seen barely takes this back to the world befo0re the currency crisis in 2013. So the RBI governor hasn’t done much to propel or help prepare the economy. Sp I think he can do 50 bps if he wants to but that depends on him but I think 50 bps is doable. I think he can do that. So that would be another catalyst for our markets.
Anuj: Let us get back to your portfolio positions. What is your call on auto names, you have long exposure to Maruti Suzuki. Of course Maruti has started to correct now but overall what is your call on the auto space and would Maruti remain your top bet?
A: Yes, it does. We still have a view that the dollar will appreciate against the yen and yen will probably move towards 140 over the next six-nine months. So obviously that is a good tailwind for Maruti, it has got some new products coming through. So we think the margin improvement for Maruti will continue to play out over the next one year. So we like Maruti in terms of the auto sector.
In terms of just autos, Maruti is a stand out for us. I know you could have asked me if Tata Motors is going to be on that list at some point but I think selling into China is going to be very tough for the next one year or so and Tata Motors in India hasn’t done very much.
Anuj: You also said that you are beginning to feel a bit more optimistic and you did discuss the China factor, which are the stocks that you think could lead the market higher from here and also do you still stick to your year-end target of 10,000 on the Nifty because that now looks quite daunting?
A: We think that on the basis of China's own fiscal stimulus, which we firmly believe will happen, interest rates come down in India and earnings will start to improve in this quarter as the raw material prices will have a beneficial impact on margins and operational gearing kicks in.
So I think that went itself into a strong kind of year-end rally so I haven’t chased the target of 10,000, I think the sectors that will lead it up will be the banking sector and I think Reliance and Maruti will be the other two heavyweights, in index which will help that momentum going forward.
Ekta: Just to argue that point on the banking space, would you be worried about what kind of exposure banks public as well as private have to the metals space and hence the susceptibility of the global commodity cycle and what is happening with China and what then could happen to gross non-performing loans (NPLs) of banks capping returns going forward and maybe till the year-end?
A: Obviously that is why I am sticking with the private banks rather than the PSU banks but once this sector gets its momentum then PSU banks will follow as well. So I think we have known about this problem for the banking sector, which is why we haven’t got overly excited throughout most of the share on the banking side. However, I am more optimistic now than I have been since anytime of this year that means we are getting towards that kind of end game in terms of the volatility but we just need China now to do something which will be more on the fiscal stimulus.
Anuj: It is very rare to see portfolios without IT being part of it, or at least among the top holdings. Of course I don’t have the entire portfolio with me, so you could have stocks like Infosys, Tata Consultancy Services (TCS) but if you could tell us your view on both Infosys and TCS, are you net long, net short and what is your call on the IT sector?
A: Our overall call in the IT sector is longstanding now. We think that decade of growth is over for the sector and it is going to be more competitive going forward and you are not going to see the kind of growth that we have seen before. So I don’t want to pay 15-16 times one year forward for single digit growth. There is no value in that for me.
So, again it is a place to hide but you hide for a very short period because actually there is no real momentum to move these stocks higher. Infosys obviously has a change in management and there is some momentum there but I don’t think one quarter- as the saying goes, one swallow doesn’t make a summer, so let us see what else we can deliver in the next quarter but it is going to be tough and I don’t want to pay those kind of price to earnings (P/Es) for a tough environment in a sector which is going to be hugely competitive.
Ekta: How worried are you about the rupee depreciation? It is at two-year lows, do you think we are well protected on the rupee or how would you view it? As a positive because then maybe incrementally exports would pick up for us or would it be a negative considering maybe similar to what we saw in 2013 as well?
A: When the rupee depreciated so much in the currency turmoil, did we benefit from higher exports? No, we are not an exporting country; this is a domestic growth story only. So, the rupee being stable has reassured investors offshore, not scared them, so if I look at the depreciation, I am hoping now it is really reflecting that we are going to get a 50 basis points rate cut.
Anuj: What is the big risk to this market? You still said that you are sure of a second half rally but what is the biggest risk and what is the risk that maybe this is not just a bull market correction but maybe a bit of a near-term bear market? What would make you change your view on this market?
A: There has to be some financial problems from China which would be so severe that would affect us all globally but I don’t see that happening. So, that is not what I am thinking about but I suppose if I have to fast-forward and say in a year’s time if we were still facing some kind of slowdown globally, it is that obviously people will start to question Central Bank’s policy and if they do that then that is when you lose your confidence in the overall economic growth, the financial monetary policies of the countries but we are still way away from that, so hopefully that won’t happen but that would be the biggest fear for me.
I want to add something on China because whatever it is growing at 5-6.5 percent, I don’t know because the figures are not transparent but it is significant growth compared to anywhere else in the world. So I think we are overplaying some of it -- it is sector specific to be honest rather than it is globally all sectors.
Secondly if you think about it being the second largest economy in the world, so was Japan in the 1980s and whilst Japan has not done anything for last 20-30 years, it didn’t stop markets and economies growing over that period. So, let us not be too gloomy about this. I know I have been gloomy most of the year but now I am little more optimistic.The Great Diwali Discount!
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