GST will halt economy for 3 months, which is worrisome: Holland

While the global scenario is looking up, certain hurdles like the upcoming elections in France in next 2-3 months will be in focus. The upcoming rate hike by the US Federal Reserve next week is already factored in, said Andrew Holland, Chief Executive Officer at Avendus Capital Alternate Strategies. Rather, eyes are on what Mario Draghi will do in the next ECB meet. The US dollar, which has not done much in past few weeks, will continue to rise in the first half on this year. In the second half, other currencies like yen will be more in focus. No big move on currencies is expected this year. Global growth is expected to take off with fiscal spending. Emerging markets flow will come into India, but it will be at the backend of FII flows, Holland said. Holland said that market could get dragged up to new highs by global markets. However, it is better to hedge in the current market. Implementation of GST will halt the economy for three months, which is worrisome. Also, the earnings forecast for next fiscal has already come down to 15 percent from earlier 20 percent. On consolidation in the telecom space, Holland said: “Battles have just begun, war is not over yet.” He prefers private sector banks and non-banking finance companies over public sector banks.Below is the verbatim transcript of Andrew Holland's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Anuj: What is the big worry for the market now? What is the big trigger for the market now, state elections or global cues especially considering we are so close to the Fed event, what are your thoughts on that?A: Chairwoman Yellen has already said that she is likely to increase rates and the market is saying there is 90 percent probability, it has already pretty much factored in. in yesterday's jobs reports, we saw finally the dollar gets stronger against all the currencies and that is why we have seen metals continue or commodities continue to see some losses.In terms of the state election, expectations again remain high. I don’t see these big events in that respect to the sentiment for one-two days and then we will move back to the fundamentals of not just India but globally what is happening. So I think the Fed event is pretty much baked in in terms of what we expect. We will see what the ECB does today and what Mario Draghi will be thinking about the Europe starting to increase rates. So that will be a little bit more interesting to me than the Federal Reserve.Latha: As the dollar climbs and today it has climbed beyond 102, the dollar index, yields have gone up to 2.56 even tried to touch 2.6, conventional wisdom is that all this is bad for emerging markets, bad for India but we have seen the strongest amount of FII flows since the past several months in the month of March after these rates have started to get discounted, a billion dollars have flowed in, so what is in it for us?A: In the past up until yesterday, the dollar and bond yields haven’t done very much. If anything the dollar had weakened. So maybe there is a final realisation that rates are going to be hiked and the jobs data was good, it has finally given the dollar the fillip, which we have been expecting. As I said, we have to see what the ECB does today because that will have an impact.However, if global growth is about to take off because of fiscal spending along with lower and personal tax then the emerging markets will see flows because obviously there will be some countries like South Korea or Taiwan who benefit from that. Emerging market flows will come to India as well. Maybe a lower proportion of the overall flows but that will happen overtime but India will be at the backend of FII flows is global growth is to hit more than 3 percent mark over the next one year. So it is good news that we are seeing some FII flows after a long time but I think if I am right, emerging market flows last week as you saw some outflows so maybe the risk on trade finally comes to India from FIIs as well.Latha: Is the rupee playing the trick? It is unusually strong at a time when the dollar is strengthening. Will that make us outperformers?A: I don't see this continuing for very long in terms of if the rupee will weaken from here. So what we expect is the dollar in the first half of this calendar year to continue to remain strong and second half it could more be the euro and the yen which strengthens as their economy will start to improve as well. So that is how it is going to play out.The rupee is around 70 level that would probably be where I could see it heading over the next one year. So no dramatic moves, I don't think in currencies this year from what we have been seeing for many years now. I am more little less worried about the currencies having such an impact going forward but obviously we do have other big events like France elections coming up which could throw that into complete turmoil.Sonia: This year has been interesting because the most non-traditional sectors have performed if you look at telecom, if you look at Reliance that was dormant for so long has started to perform and even metals continued that upmove. Any of these spaces that you still like?A: Commodities and metals we have liked or been more neutral from the last time we spoke. If I am expecting the dollar to rise, I still feel metals would probably see some weakness from here. So I don’t think I need to be in that sector at these kind of levels.So I would probably wait for any kind of further retracement in that. Telecom is still a bit battling, if these mergers go through, I still have to see if two and two is equals to four or is less than four. So I am not overly convinced by the telecom sector.Whilst Reliance have put out a very strong guidance for our growth, it has to come through. So there is a lot of expectations there but even if they met half of those expectations, the rerating that we have seen, I think is justified. So this one to keep on the radar but refining margins in Singapore have been coming off recently. So that will have in a more shorter term a bigger impact on the profitability. So those two sectors -- telecom, I think there is a lot more, the battle has just begun, the war is not over yet.Anuj: From hereon what kind of long stance would you have on this market, what kind of long shorts would you have and right now do you have any shorts and any particular sectors where you are carrying shorts?A: Our fund has its first close tomorrow so next week is when we will be putting money to work in the market but I think we would probably be reasonably sized hedged at the moment if we were in the markets. I would say anywhere around 50 percent because we have seen a good run up, the fundamentals to my mind haven’t changed in India. I am still concerned about GST and the implementation of GST. The long-term benefits are there, we all know about them but then in the short-term it does have that potential to grind the economy to a halt again for at least three months as implementation takes place.Earnings -- most brokers are now bringing down their earnings. We haven’t even started FY17-FY18 but the earnings forecasts are coming down from 20 and now to 15. I suspect by the time we get into April, May, they will be near to 10. So valuations are challenging but they are challenging around the world at the moment.The Trump rally which everyone keeps talking about basically is inherited a good economy or a strong economy and is on the back of that. So if anything, all you can do is you can just ride on the wave of a stronger economy. So let us do what President Trump does. So far he hasn’t done anything to scare anybody too much but it is early days.Latha: What would you buy in the consumption space?A: The valuations again remain very challenging to my mind. I think this sector is where we continue to like and I will continue to like despite the valuations. I cannot see how public sector undertaking (PSU) banks can compete going forward anymore and so they are just going to continue losing market share in not just the private banks but any new bank non-banking financial companies (NBFCs) and so forth. So it is going to be a trade for the PSU banking industry going forward unless there is some big change in terms of mergers and then management and strategies for those banks. So the private banks is where I would continue to look at. NBFCs continue to look interesting as well.Building materials is a pretty crowded trade at the moment in terms of valuations and expectations and because our views are that global growth starts to pick up, I am looking at companies where there are big exposures into US, Europe in particular or have been a money factoring or facilitate in those countries unable to benefit from the global growth and the example would be obviously Tata Motors, Tata Steel would be beneficiaries of both the US and Europe starting to see a strong growth in terms of gross domestic product (GDP).Sonia: What are you pencilling in as far as growth is concerned for the Nifty itself over the next three-six months? Are we looking at new highs before half of the year is out or do you think we could stutter around these levels itself?A: I think we could get dragged up by global markets towards the new highs. It wouldn't surprise me in terms of that liquidity rush to equities. There is nothing on the horizon I see in India apart from the implementation of GST, which is worrying me. Globally up until the end of April and early part of May when we will know about the French elections, but obviously we will have a clear idea or some idea of how things are shaping up in France before that. It is only a few things on the horizon which I see which kind of worries me, I don't see trade wars happening from any of President Trump's policies at the moment but it remains a risk.So the risk is there but the biggest risk is France to my mind and I think if governments around the world continue to say or do and implement infrastructure spending alongside with lower corporate and personal tax then we could see a very strong global economy. That would probably mean that interest rates have to rise not just in the US but Europe and Japan as well and that in the very short-term would not bode well for India in terms of that commodity prices will probably rise because that is going to be the part of the factor of inflation.So that is why I said, India is at a back end of the queue for foreign institutional investors (FII) flows this year and will continue to be and obviously we have a very strong domestic investment pick up here in terms of flows. So that will continue to keep the markets bubbling along. So I am not overly negative. I think 5 percent correction is a big thing I can see right at this moment but I am not banking on it. We could tread water for a bit longer and constructively, I am more bullish than I have been for a long time about the global scenario but there are one or two hurdles that we have to jump over in the next two-three months.(Reliance Industries, which owns Reliance Jio, also owns Network18, which publishes Moneycontrol.)