In terms of themes, largecaps are the best bet right now for investors and investors should stay away from the mid and smallcap stocks because the volatility is likely to continue in this space, says Andrew Holland, CEO, Avendus Capital Alternate Strategies.
Volatility has returned and money is moving from one asset class to another are some of the highlights of the massive fall which we witnessed in the last one week, Andrew Holland, CEO, Avendus Capital Alternate Strategies said in an interview with CNBC-TV18.
But, there is one thing which stood out. If we look at the history, whenever market has fallen in a big way most of the asset classes have also witnessed the impact.
However, the interesting thing about the fall is that none of the asset classes reacted. Whenever markets slip, we usually see a flight to safety to other assets classes such as gold or bonds, said Holland.
The bond yields didn’t fall that much, the gold price fell etc. This is unusual to happen considering the turmoil seen in the markets. The volatility is likely to remain in markets, but the risk across asset classes is reflected in markets.
Bonds could well become optional asset class if the coupon gets fixed around 7.5-8 percent. One big reason for the shift is the fact that the return expectations from equities will be a lot less than what Street was getting before.
In terms of themes, largecaps are the best bet right now for investors and investors should stay away from the mid and smallcap stocks because the volatility is likely to continue in this space.
Commenting on the recent correction, Holland said that we are not a bear phase, it is only a healthy correction which was required. He like private banks and auto stocks.
Below is the verbatim transcript of the interview.
Sonia: Jonathan Garner indicated that market falls don’t end like this, there is generally a large outflow before which a trough can be called, would you agree that there is still sometime to go on the downside?
A: What is interesting about this fall is that no other asset classes reacted. Usually you get a flight to safety, bond yields didn’t fall that much, gold prices fell, metal prices are going to held up pretty well. So it is kind of unusual for that to happen when you have that kind of turmoil in the market and with the volatility index (VIX) still very elevated in the US, bond yields are virtually where they were before all this happened at 2.78, we might revisit this again, I am not sure that it has all been flushed out of the system yet. So I think the volatility is going to remain I am afraid. I am not sure that the risk that we have seen taken of in one asset is reflected elsewhere. So with bond yields moving higher again overnight, we are back to where we were.
Latha: Volatility will return but in all that ferocity, after all that dreaded ETN product is out of the way, we understand it is getting wound up by February 20th?
A: I think there are a few things which are important; one obviously after Budget a long-term capital gains tax (LTCG), note that free ride for the markets are over now and I think the second thing that the bull market in complacency has been hit very hard and as we go through that in the next week or so, as people look at the different asset classes, they can now look at it. Bonds become an asset class. There could be quite a bit of switching around so as such – I am not sure that it is over yet but I am not turning overly bearish as I am not – we have been expecting this kind of problem in the bond yields for some time now and finally it has happened but I don’t think the risk across asset classes have been reflected yet.
Latha: In India itself the monetary policy today could hike, though that is the least possibility but they could indicate hawkishness, so do you think in India bonds genuinely become at least an optional asset class where some money would move?
A: Most definitely, that is what we will be seeing. If you can fix in 7.5-8 percent over the next few years, why not and your return expectations hopefully from now for markets will be a lot less than it was in the middle of January. Therefore, you do get the competing asset classes you didn’t have before and that there is no alternative is something that -- there are no alternatives. So I think it is going to be a little bit of moving around of assets in next few weeks.
Sonia: If you had to summarize it for us, do you get a sense that this is only an interruption of this large bull market or could this be the start of the bear phase?
A: I am not thinking we are in a bear phrase. I think this is a healthy correction from the excesses that we have seen. Even if you take the falls that we are seeing today in the last few days and not even the recovery, that the US market is still up 30 percent since President Trump came in and our markets are still up 20 percent over the past years. So it is a healthy correction which we needed but it is at least highlighted that there is risk and maybe that complacency in the markets will go away now.
Latha: Therefore, you wouldn’t advise investors to buy right away, you think markets could smart under the wounds and still give you more attractive levels?
A: That could be the possibility but I think when you see these kind of shortfalls and the same elements still be in there, bond yields a lot lower, I will be a lot more happier or the VIX was under 20, I will be a lot happier but it is not, so I think just let the dust settle for a few more days and I think if markets do fall, it just gives you the better entry points.
Sonia: So what looks like a good entry point now, is it the financials, is it the rural stocks because we are definitely seeing some buying over the last few days?
A: The way I look at it is that if you mentioned at the very beginning about that overseas funds will be looking to sell and we are seeing that through ETFs as well in more passive ways, so the opportunities land up in the largecaps because that is where the liquidity is. So I think you are going to find quite a number of -- obviously we like the private banks, we like selective autos, we like selective metals, so all the favourites will become cheaper but the sectors which have been overextended as well in terms of optimism where those share prices come back to range we should be more happier. So some of the sectors that you weren’t so gung-ho about in terms of the valuations will give you a good opportunity again. So I think it is a good way to reallocate around your portfolios well.
Latha: I don’t know if you are still in that long-short fund but in a hypothetical long-short fund, do you think it will be better to have a larger percentage of shorts, what should the ideal ratio be?
A: There is never an idea of ratio, in a long-short fund, we have to try and manage the risk and you can do that for a number of ways. In rising market, you don’t want to have too much high beta and in the markets we have had, you want little bit higher beta as well. So you just have to manage risks as we get along. Fortunately for us, one of our policies is not to have huge positions around big events and that was the Budget. So that helped us and obviously we had reasonable hedges to go into the downfall. So now it is much of a way we see some value. We saw a little bit yesterday at the very beginning in the market but again we are back to the kind of levels where we are not feeling overly bullish but we are not probably more neutral but we still see risk to the downside because things haven’t changed.
Latha: You said in your buy list or in your fond of list autos, private banks and metals, I didn’t hear you say infotech. Would you reconsider IT stocks?A: IT has been – we have been very negative on IT but the latter part of last year we became more neutral because the damage has been done. We are very pleasantly surprised with the commentary from the IT companies. So we could be more neutral in our stance but it is a great place to hide. As I said, even when the markets were falling, the dollar remain weak, so you did not see that kind of extra weakness in the rupee which would normally expect when you have big falls in markets.