Brexit might trigger volatility in the currency markets rather than the equity markets, said Andrew Holland, CEO of Ambit Investment Advisors. Brexit will have tax implications for the UK, Europe and other countries may start thinking about exiting. It may largely have tax implications among members of European Union and may influence them to think about exiting, he added. While negative global factors are ebbing away, a good monsoon is the only key move for the markets to move higher and consolidate, he told CNBC-TV18. However, if monsoons fail, he is of the view that the government will have to interfere with fiscal deficit and increase expenditure, which the investors will not like.Meanwhile, earnings momentum will continue to remain the catalyst for Indian equity markets. Holland believes while two-wheelers, and select private banks and non-banking financial companies (NBFCs) have growth stories embedded in them, public sector unit (PSU) banks are still about uncertainty. Further, Holland said any correction is a good time to enter into NBFCs. On Raghuram Rajan's term, he is less worried because any new RBI governor (in case of no extension for Rajan) would tread the same path of growth for the country. Below is the verbatim transcript of Andrew Holland’s interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.
Reema: We have outperformed the Morgan Stanley Capital International (MSCI) emerging markets by nearly 10 percent from our February lows, even in dollar terms. Global factors have helped, good earnings, projections of a good monsoon, all that has helped. But from these levels, what is the way forward?
A: We are probably going to consolidate a little bit and there are two factors here. There is the global factor which is ebbing away in terms of concerns. A little bit of excitement yesterday on Brexit and the vote there. But we are still early days, so expect those opinion polls will change quite considerably. So, a bit more volatility in the currency markets rather than the markets themselves. Then of course, we just have to wait for the monsoons now and that is the key. Nothing much different than what we spoke last time around, so it is a global ebbing away and if the monsoons, which we are hearing so far are okay, continues like that, then obviously, the markets can move higher.
Sonia: Someone was making this point earlier as to how logically, the Brexit should not have any long-term implications on emerging markets like India. At worst, perhaps just a short-term 5-8 percent moves on the downside. Would you concur with that view? A: It is a bit more complicated than that, I mean from the outset. They say, Britain leaves Europe, then nothing really changes, a German company buying from a UK company, still euro and pounds. So, there is no real change. But obviously, it will have tax implications on the UK plus then would other countries in Europe start thinking about an exit as well. You got the Spanish elections a few days later. So, all of these things will play on investors mind in the future about Europe. Now, if Europe starts to disintegrate, then obviously, that will have a global impact in terms of trade as well. So, that is the biggest fear. I am not going that way.
Britain moving out of the European Union per se does not have an impact in emerging markets. It is the implications for the rest of Europe you would have to look at.
Reema: You said that the market is likely to continue with its consolidation phase for some more time. How much time do you think we would be consolidating and what would be the triggers which would push us higher or lower?
A: As I said, monsoons really is the key, because if monsoons are as expectations, then that will be the extra fillip to earnings in the second half of the year and that is where valuations can probably push higher on the expectations that earnings will start to pick up quite considerably in the second half but also into 2017. So, that is the catalyst for the Indian markets at the moment. The RBI policy today, I do not think will be concentrating really on the rate hike. It is on the factors whether he is going to stay or not.
However, a lot of people ask me if Governor Rajan is not there, does it really matter? What will foreign investors do? I have been here a long time, as you know, since 1997. We have always had good RBI Governors. I do not think anyone in the past have said we have a bad RBI governor. So, I am less worried about that, and I think foreign investors will be less worried about that too.
Sonia: So, the question is not so much about Governor Rajan’s term not getting extended, but it is more because of the kind of legacy that he would leave behind and it generally takes at least two terms for a Governor to properly establish and give out good results. So, the only fear is that he would not be there for the second term to let that good legacy run through. Do you think that would cause some amount of trepidation in the market, and if yes, what could the extent of the downside be?
A: First of all, if he stays it is great news. But if not, why would the new RBI governor change the path of the RBI. I do not think that will happen. It is a bit like, if you go back to when the Congress first came into power in 2003-2004, they got the legacy of what the BJP had done before and that helped gross domestic product (GDP) growth, so if the momentum is there and it can continue that, then I do not see that you need to change anything that Governor Rajan has already done.
Reema: As of now, it is the cyclicals which have got the momentum while defensives have taken a bit of a back seat. Is that the strategy? Do you think we will continue, which are the stocks and sectors which are likely to do well now?
A: We have been concentrating our portfolio towards two-wheelers. We never really liked defensives, they are just too expensive – Hindustan Unilever on 50 times, that does not leave any room for any error there. So, we have not liked defensives apart from obviously, the times when we get volatility in the markets. In fact all the defensives, IT and pharmaceuticals as well are not part of our favourite basket, have not been for some time. So, we are looking for the growth now of the economy and that is really where we are seeing far view and that is what has been moving the markets higher as well.
Reema: So apart from growth in two-wheelers, which are the other pockets that you see growth and therefore, you would bet on?
A: We continue to keep with the private banks and some of the non-banking finance companies (NBFC) because that is where the growth is as well. Public sector undertaking (PSU) banks are still a lot of noise around what can happen, what can change, but until we see any definitive action by the government that it is not a sector we really need to be in and plus, even if you take away some of those problems, you still got the management to cope with in those PSU banks. So, there are big changes there. I do not think it is a sector we really need to be buying and holding. It is one of those sectors you rent when you think there is an upmove._PAGEBREAK_
Sonia: There seems to be no great positive trigger here on. We talk about good earnings. Some amount of that is already priced in. The monsoons, well no one can answer that question just yet. What do you think could be the next trigger that can take the market out of this range of 7,900-8,200?
A: It has to be the monsoons. It has to be the fact that the monsoons have been okay, because that is the trigger for the earnings growth in the economy to continue to maybe move up a gear from where we are today and that is really where we are. If the monsoons fail, then obviously, given the drought situation in India, you have to be thinking that the government would have to, not abandon, but will have to look at its fiscal deficit and start spending money and that would obviously not be liked by foreign investors in that respect. Whilst it would be needed, it would not be liked.
So, you have got to be slightly careful in terms of what is going to push the market higher. Global factors are helping, but for us to get on what we are now at 17. So you to justify that and further move that ahead, then you have got to have the expectations that earnings are really going to start moving ahead. Of course commodity prices are higher now, will have an impact on quite a number of sectors which have been benefitting from that specially the consumer companies. The airlines, all of those stocks are coming under pressure now in terms of their margins.
Sonia: So would you buy any of the monsoon related stocks? Any of these tractor makers, some of these paint companies, the consumption related stocks basically, apart from the two-wheelers that you spoke about?
A: Some of the valuations are quite high as well. So, we have been very selective in what we have been buying, but again, it is not really where I feel that we are going to say that is the definite winner because you do not know the outcome and we certainly not experts on this. So, I am just going to have to wait. Even if I miss the share price between now and the monsoons, that is okay, because you know the earnings momentum is going to be there and you might be paying a higher price-earnings ratio (P/E) than you are today, but you are taking less risk.
Reema: On the subject of non-banking financial companies (NBFC), they have already rallied so much like SKS Microfinance or an Ujjivan Financial. It has gone up about 70-80 percent from its issue price. Is it too late to enter into the NBFC game?
A: It is obviously when you see those kinds of share price rises, then it is obviously a little bit more fearful. So, there is only correction then probably a good time to be looking to the NBFCs, but we are holding on to what we hold.
Reema: But holding on is a lot easier than entering in at these levels.
A: I would probably be a little wary of rushing in at the moment and that said the global factors are supportive at the moment. They could turn with any fears on Brexit. You never know, and of course, if the monsoons are bad then everything changes. So, a consolidation around here as we go along the next month or so with the monsoons and it is probably where we would be.
Sonia: So tell us a little bit about your own Alpha Fund. How much are you long, how much are you shot and what has changed since the last time we spoke?
A: We deployed more money since the last time, so we are about 50 percent hedged at the moment. On the basis that we could get a little bit of volatility, not much but a little bit of volatility and that is where we will probably keep adding as we go through the month and as we get more comfort on the monsoon as it progresses.
Sonia: So, you will continue to buy on dips in this market, if the monsoon progresses well?
A: Yes.
Reema: What will be your Nifty target?
A: In terms of the Nifty target, once I can get clarity on the monsoons, I will be able to give you a better idea. What we are thinking now is that our earnings forecast of 5-10 percent, if the monsoons are good, then that could easily increase and that could be the kind of increase we are expecting in the Nifty for the full year. So, 10 percent at the moment is if you take from the beginning of the year and then it could go higher depending on the earnings upgrades we get.
Sonia: What about the downside? Where do you think it is protected, because the consensus view seems to be that any global turbulence will not cause more than a 10 percent downside, but sometimes, the market does not oblige consensus, as we know. Do you think there is a big downside in store or do you think it is protected somewhere around this 7,800-7,900 level?
A: Where the downside is, as far as we are concerned is that it has to be a China kind of problem which will take markets down by that much. And that would be where the fear would come from. Fears over Japan and Europe continue to persist but unlikely to take your markets down so far. If China comes out and says growth is a lot worse than people are expecting at the moment, then that would have an implications globally and that is where you could see markets fall anywhere up to 10 percent then and then you have to really see what happens to the currency markets, what is happening to commodity prices to get a feel for what could happen in terms of is that 10 percent just 10 percent or is it going to be more. So, at the moment, 10 percent does not sound unreasonable, but it has to be China and I do not think it is any other event at the moment.
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