Lack of leadership dragging mkt down, says Ambit's Holland

Lack of leadership, given the global turmoil, is impacting the market adversely, says Andrew Holland, CEO of Ambit Investment Advisors. Speaking to CNBC-TV18, Holland says China’s government need to work more on the fiscal policy front to aid recovery in global markets. On the corporate earnings, he says that despite the reform work done by the Modi government, it will take time for earnings to bounce back. However, he is positive that earnings will start picking up from next year. Lack of investment and outflows in India is due to the emerging markets (EMs) phenomenon, he says adding that the market will see FII inflows from the new year. Holland is bullish on the banking sector with HDFC Bank as his top pick. On the other side, he is short on metal and oil stocks. He also like Ramkrishna Forgings and FIEM from the auto ancillary space. The house is also positive on Maruti and Infosys. Discussing the expectations of a Federal Reserve’s rate hike in December, Holland says the risk of it has been factored in already. Post the rate hike, inflation will go up in US, he adds. Below is the transcript of Andrew Holland’s interview with Sonia Shenoy, Reema Tendulkar and Anuj Singhal on CNBC-TV18.Anuj: How is the wake up with the market now? Would you say look at the midcaps, smallcaps, the market is doing well or would you say look at the index and we have been in a bear market now for the last nine months?A: We have been in a bear market, is it?Anuj: I mean it has corrected some 15 percent.A: I think the problem for the market in terms of the index is that there is no real leadership at the moment and that is where the problem lies. I mean even you defensive sectors being punished whether it has been pharmaceutical because of the rules coming out of the US, in terms of the consumer stocks. Basically, the consumer stocks themselves are under a lot of pressure in terms of trying to gain market share, losing margins in trying to do that. So, in IT, Infosys came out and said, we are going to change our model again now, so we are going to have to wait some more quarters for that.So, whether that works, we do not know. So, there is no leadership from the defensive sectors which would have kept the market higher, given that what we have had globally. So, there are so many moving parts, but for India at the moment, the other sectors that you want to look at, say the banking sector, they have still got the problem of non-performing loans (NPL) and no one has the conviction to go in there and buy at the moment.Reema: So, with the lack of leadership do you see the upside cap for our market and if yes, what would it be and do you think this 2015 low of 7,550 will hold at least perhaps for the next six months?A: I am trying to not think of the lows, I am trying to think of what is the catalyst for the markets to move higher. I still gone on the view that from a global perspective, we still need China to do some fiscal policy and that would carve markets ahead of what is really happening in China. But interestingly, China, Russia, even Brazil, the kind of areas where you said the biggest problems are coming out, have actually outperformed India. The story or the picture looks a bit odd in that respect because India has all the growth ingredients there whereas the other countries do not, but you are seeing obviously, a pickup in the markets there. So, is that telling you that maybe, maybe the floor of the commodity price fall is behind us or there or thereabouts which could mean that that is why you are seeing incremental money flows into these countries. Like last month, you saw more flow into South Korea because obviously, if China picks up, then Korea picks up at the same time. So, maybe money is just moving around a little bit more, not coming into India. Any emerging market, selling of funds is affecting India’s outflows at the moment.Sonia: The Modi government, post the Bihar elections has sort of set the ball rolling as far as reforms are concerned. First they started off with the rebooting of those 34 stuck projects in roads. Now there is some talk of the transfer of non-coal mines, making it easier for coal movement, etc. Will this enthuse investors, or do you think a lot more needs to be done?A: Although there is more to be done, but the problem with what, not the problem, what they are doing is excellent. For the long-term picture it is very good news, but that does not incrementally change anyone’s earnings overnight. And that is what the market is looking for; it is looking for the quick earnings kind of move higher. And it is just not happening at the moment. I was encouraged by the reporting season only for the operating margins across a lot of industries actually improved consistently. Now whether that can continue, we will have to wait and see, but if you get that top-line growth starting to pickup from single digit towards double digits, then that again will start to flow through to the bottomline. So, I am more optimistic, than I have been on earnings going forward, because next year, you are going to get financial gearing as well playing into the earnings as the benefits of interest rates being lowered will start to come through. I cannot get only negative. I know it is easy to be negative at the moment, but I just cannot get negative about India. Anuj: Your call was that towards the end we will have a big rally in Indian markets, so have you changed your portfolio? Have you added more longs in the last one month or so? What is portfolio looking like now in terms of shorts and longs?A: At the moment, we are still sitting on a heavy amount of cash, because one of the catalysts for markets to move higher was obviously, China doing something on their fiscal policies which they have not done yet. So, we are sitting on around 70 percent cash.Anuj: Is that the highest you have been?A: I have been in August we were 85 percent cash. When markets are volatile, it is not worth trying to find the bottom. You can sit out the volatility and cash is king. Protecting capital is the first thing you do.Sonia: So, you have deployed some cash between August and now and where has that been?A: That is more towards the backend of August and into September and October, but it has been, the hedges have been a very high. So, we are sitting on a 60 percent hedge even with that incremental money that we have in the market.Anuj: So, what is your top long and what is your top short right now?A: We still like the banking sectors, HDFC is a large in terms of our core holding on the long side.Anuj: HDFC Bank?A: Yes. And on the short side, we have a obviously because you have got to, you cannot take single bets on the short side, so we have quite a lot of stock, but metals and oil continue to be in the hedges there for us at the moment. We still think there is enough headwinds, whilst I said I am optimistic about commodity prices might have bottomed, the outlook at the moment and the negativity around the sectors are so strong, that it is a good hedge for the time being.Anuj: Oil is interesting, but in oil you have the users oil as well like Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL). Are you short on all these stocks or selective?A: No, it is more the Oil and Natural Gas Corporations (ONGC)Reema: Do you think the Seventh Pay Commission report which is out and has proposed a 23.5 percent wage increase to all the Central Government employees, will it move the needle of the market too much and how much of a consumption boost do you expect on account of this?A: First of all, it is a recommendation and I do not think it will be implemented till next February or March.Reema: January 1, 2016.A: So, maybe stocks will try and run ahead of that just on the relief that so many people might be spending some money. I think, if they can combine the kind of spending with reigning in the fiscal deficit , if that means they have got to cut capital expenditure (Capex) that is bad news. I mean what the government needs to do is continue to do is to continue to spend money on the economy to get that multiplier effect. So, if the two can be combined, that will be a great catalyst for the markets because you will get not only earnings improving for the consumer goods companies and we also get the industrial starting to pick up because of the pickup in the economy from infrastructure spending.Sonia: Let me put all of this together, consumer spending will go up, earnings will recover maybe in the next year in FY17, we are going to see a pickup in industrial Capex as well, then why are foreign institutional investors (FII) so bearish? Why do they continue to pull out money from India? Does it continue to be an emerging market phenomenon?A: I think it is. I think it is more emerging markets where you are seeing incremental selling and obviously, India is a portion of that. I think there is a shift going on. I cannot give you any facts or figures, I think that shift is just happening. But let us go forward and say you think the world is okay and you want to get back in emerging market. Now, do you go to an emerging market fund given its possibilities of problems in Africa or Brazil or Russia or do you start going more towards country funds? And I think we might be going back towards that. I think that shift might be going back towards country funds which then I will see India get more incremental flows going into the new year. I am less worried about that. The good news is that if you took the systematic investment plans (SIP), you are getting Rs 3,500 crore of incremental flows every month now. So, if you do get FII flows as well, then this market could shoot up very quickly.Anuj: SIP has been the story of this year. Let us talk about some more stocks. In the past you have been bullish on Maruti, that has been one stock which has been in an unqualified bull market now. Do you think it can go up even from here?A: Our view is really on the basis that the yen will probably go more towards 130 to the dollar. So, Maruti has some good products, it is doing very well. So, has a tailwind of lower input prices which helps margins. So, that is what is going to keep pushing Maruti forward, not just the product side of it, but also the operating margin side of it. So, we still like Maruti.Reema: Did you add on to any of these pharmaceutical stocks, like Dr Reddys Laboratories, Lupin, Sun Pharmaceuticals, after the recent correction. Did you add to the portfolio?A: No, on the pharmaceutical side, as I said before, you should be able to sleep at night. I do not know what is happening in the US, whether it is just to try and knock down the pharmaceutical companies in India or their growth prospects, but there is something there that you are just seeing too many problems for every single pharmaceutical company at the moment.