Not betting on mkts falling, but Japan, US cues important:Ambit

Despite a good show in the last couple of months, markets are looking a bit tired, is the word coming from Andrew Holland, Chief Executive Officer of Ambit Investment Advisors. Although Holland isn't aggressively betting on markets falling, cues from Japan and the US will be closely watched this week.Holland's fear is that liquidity-driven markets could suddenly get a nasty shock. Speaking to CNBC-TV18, Holland says a strengthening dollar has been weakening commodity prices everywhere.

In May, the focus will be on Britain's decision to remain part of the Euro zone, which will play on the markets, feels Holland. A chief source of worry for Holland is whether we will be revisiting the scare seen in February of a global recession. "I still question whether central banks have more capacity in their toolbox to regulate monetary easing," he said. While Holland refrains from giving a medium-term outlook on where the Nifty will go from its current levels, he says he will be surprised if the US Fed Chair Janet Yellen isn't more hawkish than she was in March.Ambit is bullish on the auto sector, with particular reference to two-wheelers than four-wheelers. Markets have also been helped by share buybacks, he said.He takes a stern view on banks, calling for a hands-off approach on public sector banks which are struggling under bad loans. He would any day bet on private banks.As for his projections for the first half of FY17, earnings would depend on a good monsoon, he said.Below is the transcript of Andrew Holland’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Latha: What does it look like that the near-term tactical rally since Budget day is coming to a close? Is it time to take profit and go away for the May holidays?A: You could be right there. It is looking a bit tired. We have got results, the markets are not moving higher at the moment. Maybe that is partly to do with some of the factors that you have already mentioned about a strengthening dollar, which is obviously weakening commodity prices. You have got a few meeting with the Fed and the Japanese central bank. So, that will keep people on the sidelines but as we go into May, all eyes will start focusing a bit on what is going to happen with the UK and the Brexit and that will start to play out on market’s worries. So, it is a pretty close call at the moment in the opinion polls.I was there in the UK last week and outside the financial industry, most people are thinking that they would not want to be part of the European Union. So, there is going to be a lot of swaying of the younger people towards staying in the European Union. So, it is going to play on the markets in the next one month, that is for sure.Sonia: But if you go by hindsight, every phase of global volatility has been the best time for an Indian investor to put money into the market. Do you think this time is going to be the same and would you advise buying on dips?A: Obviously, we will see what May brings and what those challenges might be. The thing here is that whilst we have had a period of stability for the last month and a bit, some of the challenges around the global growth factors have not gone away. And whilst data from China has been fine, from Europe it is still pretty bad. So, hopefully, we do not revisit the kind of thoughts that we had in February, because I do still question whether central banks have more capacity in their toolbox to do monetary easing and I know they are even talking about negative rates on loans in Japan which is in itself a bit worrisome.But overall, unless we get fiscal stimulus which I expect you will get from Japan because obviously, they will have to spend money on infrastructure following the series of earthquakes there. So, that is the good news. So, unless central banks and unless countries start to spend money or get some fiscal stimulus, then we are going to be worried about the monetary policy and how much impact it is having on global growth.Latha: One important theme that is played is the strength in the commodity space, steel space in particular, steel not being exchange traded commodity like the others. Credit Suisse has come out with a very big tactical or even a buy call on steel. Where do you stand? Do you think these stocks have more to go, the likes of Tata Steel?A: Tata Steel have had a bounce, a very big run up from where they were. We are eluding ourselves that there is not going to be further pressure on commodity prices going forward. We have seen a month and half of stability. That does not make me feel as though I want to rush and buy commodity stocks at the moment. It will take fiscal stimulus where you can get infrastructure spending or people spending, which will help the economy and therefore, you would want to be buying these stocks.But as we have not seen that globally, monetary policy is just having cash wash around and find different homes at different times. And it has been the dollar weakness where people have been buying the Euro and the yen. Maybe that will unwind a little bit now and obviously the oil prices has also been a beneficiary. This extra cash that has been in the system. So, once things change, as you always know, liquidity driven markets, something will change, which we will not like and markets will revisit or retest the initial thoughts, which were is monetary policy working?Sonia: So, putting all of these headwinds into context for us, what is your view on the near-term or medium-term outlook for the market? The consensus view is that 6,800-7,000 which was the Budget lows will hold as a firm support, would you concur?A: Depends on what would take us there. If it is a revisit of the kind of scares in February about the global recession which was something that we were not expecting or thinking about, then obviously you could retest it. But it depends on what is taking you there in terms of the sentiment or whether it is real or whether it is just concerns about the central banks’ ability to save each and every country and that is where we are at the moment.So, this divergence of central bank policy around the world and this divergence of where we are, you can equally look around at how many people are bearish and how many people are bullish, it is probably around 50-50 at the moment. So, you are kind of left in that little bit of no man’s land. We are where we are which is probably where we were at the beginning of the year, but we are still no closer to working out if the global economy is benefitting from all the monetary policy and that is where we are getting worried.With Yellen, I would surprised if she is not a little bit more hawkish this time around when the data from the US continues to be strong. So, unless she is still worried about global, which obviously markets will tell you that she should not be, then she could be well be more hawkish than she was in March._PAGEBREAK_Latha: So, should I take it therefore that you are selling current levels tactically?A: No, not really. In terms of the fund, we are about 55 percent hedged. So, we are not aggressively thinking markets are going to fall, but it is just looking tired and you have to wait for that trigger and it is just not there at the moment whether you get news about what Japan might do on this week. Just going to keep the market bubbling along, but my fear is that liquidity driven markets, have a look at over the years, always end with a nasty surprise and that is probably what is going to happen. Now, the timing of that, I do not know, but maybe May, thinking about the UK and Europe might be the trigger for that.Sonia: There are some signs though of a pickup in the economy related sectors whether you talk about the auto sales, you talk about cement demand picking up, would you advise buying for the optimist or who has a positive outlook on the market, would you advise buying into any of these sectors now?A: We have been more constructive on the auto sector and more the two-wheelers and the four-wheelers auto parts as well, but less so more recently. And obviously, the cement pack had a good run as well. So, they are probably reflecting what the results that we will see.Again, it will be interesting, as we saw today with HDFC and Reliance, whether good results really then propel your share price higher and probably the likelihood is not. So, we are being helped a little bit by the share buybacks or potential share buybacks as well. So, it will keep the market higher for a little bit longer than we were expecting but that is fine. But the run up to the obviously the monsoons, again will have the optimism there and fingers crossed, it rains in the right places this time.Latha: How do you trade the banks, all sectors? Banks and non-banks, how do you trade stocks like Mahindra and Mahindra Financial Services Limited (MMFSL) which indicate that the non-banking financial companies (NBFC) are finally turning a corner, the private banks and the public sector undertaking (PSU) banks?A: The PSU banks have had a tremendous run and it goes back to what we talked about before many times that I do not mind renting them when the sector as a whole is going up. Do I still want to own PSU banks? The answer is still no. There is a lot of problems out there. Here is what the feeling is at the moment. It is that we are kind of coming towards the end of the problems, non-performing loans (NPL), maybe one but in two quarters time, it is all finished. That is a pretty optimistic view of the NPL problem and I am okay with that. I am not going to argue too hard against it.But if you look at HDFC’s results, they have obviously taken market share from somebody and that is obviously the PSU banks. So, the private sector problems in the PSU banks are still there. I have not seen any injection of capital, I have not seen any change in management. I have not seen anything different. So, even if the economy starts to pick up, where will the PSU banks be and I think they will be lagging miles and miles behind the private banks. So, the private banks is where I am going to continue to focus. And then obviously with the new banks coming through, obviously puts more pressure on PSU banks. So, there is going to be a big overhaul in this sector before I can think that I ever want to own a PSU bank.Sonia: I wanted your thoughts on earnings because so far we have seen a fairly positive patch but that is how we see it in the first quartile of the earnings season. What do you think Q4 could bring about and also what are your projections for the first half of FY17?A: The first part of the earnings season has hopefully got the best of companies than the worst ones. So, as you go along, we will see that deteriorate. For the current financial year, we are looking at earnings of between 5-10 percent. It is a pretty low number, if you can talk about base effect and so forth, but I am more comfortable in that scenario and seeing that a few things play out. One, the monsoon has to play out because that could have a big impact on earnings. If that was the case, then obviously the risk to me is on the upside rather than the downside if the monsoon is favourable this time around.