Indian equities are headed lower near term because of the nervousness in global markets as well subdued corporate earnings growth, says Andrew Holland, CEO, Ambit Investment Advisors.
In an interview with CNBC-TV18, Holland says he expects global equities to correct 5-10 percent in the short term and sees upheaval in currency markets because of the conflicting monetary policies being followed by central banks of the major economies.
He says the easy money has already been made and investors should brace for some tough months ahead. He sees little scope for an expansion in the forward price to earning multiple of the Indian market beyond 17, and does not expect the Nifty to top 9000 anytime soon.
Holland is bearish on IT, saying valuations are expensive. He expects earnings downgrades in the sector, and sees pharma as emerging as the preferred defensive play.
He is bullish on financial services firms and expects the RBI to cut interest rates by another 50 basis points by June this year.
Below is the transcript of Andrew Holland's interview with Latha Venkatesh & Sonia Shenoy.
Latha: You have said in your post Budget note that you expect 8,500-9,000 range to hold. At the moment we are in the middle of the range, do you think that you would worry that 8,500 could be taken given that there are no near term positives?
A: It could be number of factors that could take us below that. However, in India I am watching what happens in parliament and if none of the key bills or ordinances is passed then we are back to square one and I do not know where the earnings growth is going to come from. So I am saying at the moment that on a PE of 17 I do not see any further PE expansion for the market. I think the easy money has been made and the balance of the year is going to be lot more volatile and it is going to be very much down to sector and stock selection is where you are going to make most of the money. So it is going to be tough few months ahead of us.
Sonia: When you say a tough few months. What are the sectors that you would be most cautious on now where both valuations look expensive as well as there is no improvement in earnings, so perhaps we could see increasing pressure on these names?
A: The sector which we still feel negative about is the IT sector. We think valuations there are still too high. The decade ago which you saw for the sector is over and it is going to be what we have seen recently. We have downgrades by analysts to the IT companies. It is going to get worse from here. So PE expansion there is just not going to happen and earnings aren’t going to catch up, so I expect further underperformance in that sector.
Consumer goods is probably going to be okay but valuations are far too stretched. I think it is more in terms of where you think the market going. I think the market probably heading lower in the near term and if global factors come and scare us little more then we could see lot lower levels than we have today.
Latha: Talking about your erstwhile favourite sectors – financials. Actually the healthier parts of the financial space which are the private banks have been lately struggling. Are they now at attractive levels where you would buy them like Axis Bank, ICICI Bank?
A: Those are the two that we are not focused in on. We think there is value elsewhere. There are few things about the banking industry that we like and our view is that the interest rates will continue to fall sharply and we are expecting at least 50 bps by June. So this will help the banks repair their non-performing loan problem over a period of time and the game changer in the Budget was the potential of the bankruptcy laws and if that was to come through then this would be a great game changer for the banks and if we can see some better management in public sector undertaking (PSU) banks then that would also be great for the sector. So it’s a sector we like – it had great run recently and will be the first one where both local and foreign investors will take some profit off the table if there is something outside their control which they do not like i.e. the market globally falling sharply.
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Sonia: What is your assessment of how the global markets will shape up from hereon given the indicators that we are getting so far, do you foresee any major correction in global equities?
A: I do and I have been gloomy about this for sometime. It just seems too easy to me. It is like we are in currency war and no one is talking about it. Everyone is appreciating the currency, central bank is doing so. I do not know where it stops. I am expecting maybe Japan will do another firing up its arrow. So another round from Japan coming, the yen is going to 140 quickly which is why we like the Japanese lead auto companies in India but if that’s the case then it tells me that there is a demand problem out there and if that happens plus you get interest rates rising in the US when demand is faltering.
If you remember when we had those, when it was announced in August 2013, we all got scared about tapering. I think we are going to get scared about interest rates going to go up in the US again and that’s going to play out in the next few months and market is at new high. So I feel that we overbought globally and you could easily see 5-10 percent correction in the very short-term and that will get played out in emerging market currencies and that is where I worry because if its Venezuela or Brazil, Thailand, Indonesia - I do not know whether it is going to be played out but it will be played out and it is going to bring this back to emerging market problems again which we ld managed to get through in the past one year.
Latha: You feel that we have touched the highs for the moment revisiting 9,000 looks like a far cry?
A: I do. I think 9,000 was a push. You had all the favourable factors like a good Budget, the RBI cutting interest rates by 25 bps and with a PE of 17 you now have to buy time until earnings start to catch up. I suspect that this quarter that we are going to see, nothing has changed and it is again on the ground in the last quarter. So I do not see earnings giving lot of hope in this quarter as well.
So, come April we are going to see a number of things. One hopes that some of the bills get passed in the Parliament but also we are going to start seeing the government start to throw money in infrastructure spending and order has been given out to kick start this economy. I am so bearish, see 15-20 percent earnings growth this year but there is are lot of hurdles that we have to get through and with the global market which could be a bit scary, we look to the negatives rather than the positives
Sonia: What are the kinds of stocks that still perhaps offer value in this market? There is plenty of buying that we are seeing in pharmaceutical names for example, anything that recommends a buy at this point?
A: Pharma is taking over from IT as a more defensive sector with better earnings potential and that shift will continue, but fund managers are just repositioning for a sharper fall in the market, so going a bit more defensive in the short-term. However, you will see that shift continue away from IT towards pharma over the course of next three-four months because the IT story as we know it, I am not saying it is are over – that’s a wrong word but the decade of growth is over and that’s for sure.
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