Valuations not compelling enough to jump into market: Holland

Though headwinds such as policies of the Donald Trump government in the US exist, Andrew Holland, CEO of Avendus Capital Alternate Strategies Pvt. Ltd is optimistic on the global scenario. Speaking to CNBC-TV18, Holland said India continues to shine in the long-term. The only negative in short-term is earnings, which are unlikely to grow much this quarter, but won’t be a disaster either. Guidance of 15-20 percent earnings growth still needs to be revised down. "Valuations still are not compelling enough to jump into the market," Holland added. In the upcoming Budget, he expects government to increase fund allocation to the infrastructure sector. Holland further added Nifty could inch towards the 9000 mark if Trump policies are not unfavourable. Below is the verbatim transcript of Andrew Holland's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: It has been a good new year so far at least for the Indian equity markets but how are you positioned as we head into key events like the Budget as well as we get into the thick of the earning season?A: I am little bit more optimistic this time of the year than I usually am. I think that is more to do with one of the things, which if you remember I talked about many times Russia was moving away with monetary policy globally to fiscal stimulus not just through infrastructure spending but also through lower corporate tax or individual tax. That is what is starting to play out globally now. So that is the trade, which we are seeing in terms of expectations of better growth in the developed markets. Then that is obviously going to be good for stocks going forward. So little bit more optimistic in terms of the global outlook.There are some headwinds, we don’t know what the border tax might be from the President-elect Trump and obviously we have Theresa May in the UK talking about Brexit. So, there could be some short-term headwinds between now and April with the French national elections as well. So, it is going to be a little bit volatile in that respect but overall the global backdrop is looking a little bit more positive for some time.Anuj: What about Indian market underperformance compared to the other emerging markets and in that even for the fund flows, we have seen some bit of reversion back to the global emerging market funds but India has not seen too much of inflow in fact we still sees outflows at least in the cash market. Your thoughts on that?A: There are three things there -- one obviously is that if in the developed markets you see more growth in terms of gross domestic product (GDP) than some of the markets in Europe in particular looking quite attractive, that is what has been playing out there.For India, I think the problem we are grappling with still at the moment is – is this year going to 2017-2018 where we are finally going to see 15-20 percent growth in earnings. We have been talking about that now for two-three years, it has still not played out. So valuations are still not compelling enough to be jumping into the market apart from certain individual sectors or stocks but valuation wise, the question is do earnings still have to be revised down from the 20 percent which most forecasters or brokerages are saying at the moment. That is possibly correct. So we might just trade a little bit longer around these levels. As I said, the backdrop globally is more positive. So I am not overly negative on the Indian market at the moment.Latha: Do you therefore see the markets or the Nifty in particular breaking past this 8,400-8,450, do you see it reaching out somewhere closer towards 9,000 in Q1 itself?A: It is a possibility. Let me give you the reasons why. Obviously if President-elect Trump comes in and if it is a fiscal and corporate kind of stimulus in terms of lower taxes and obviously that would have the growth stocks and emerging markets following that lead if the Budget delivers on some of our expectations of lower corporate tax, higher tax slabs for individuals and so forth then you can see, that is the momentum you could have for the Indian market in between now and April. I think they will start worrying about what is going to happen in France and Europe but I think between now and April unless President-elect Trump comes out with some policies, which can point to huge border tax. But if he doesn’t do that which hopefully he won’t then the markets could see a good rally globally.Sonia: What is the most important thing that you would watch out for in this Budget that could be a make or break markets?A: In terms of what the finance minister has to do and probably this is a follow-through from what Prime Minister Modi is doing. We will see more money spent on infrastructure and that is going to be the key. If you can bring down corporate tax and increase the slabs for individual tax and that gives us the momentum to move forward without hurting the fiscal deficit too much continue to attract investment into India. Interesting thing about – there is a global trade war and I think investors were very quickly focusing on countries wise domestic demand and India stands out. So whichever scenario I am looking at -- at the moment, India is standing out in terms of the prospects for the coming year. I am just bit wary on earnings in the short-term because the forecast is a bit too high.Anuj: Especially looking at Infosys and TCS’ earnings -- that has been one pocket, which has prevented this market from breaking out. The banks have done well but IT is capping the gains. Do you get the sense that the risk reward is favourable now or would you avoid it completely?A: I have not liked IT for many years and I continue not to like it. There is a lot of change going on in terms of technology but they do have to change what they are doing or either pay out huge dividends. So I am just a bit worried about the IT sector, it is still not compelling enough for me to say the valuations on that witness a lot of change to go on and obviously we will also have to see what Trump has to say in terms of visas and what kind of border tax, which he keeps talking about.Latha: I wanted to ask you about the big elephant -- demonetisation. We were talking about it all the time but the first few results that we got, DCB Bank, IndusInd Bank, South Indian Bank, DHFL, LIC Housing, all of them logically ought have been hurt by either SMEs or home loans or small borrowers who perhaps couldn’t pay, it didn’t show up. So do we start taking away this negative impact that we had put into the earnings or will this devil come back to haunt us in Q4?A: I am in between in terms of – because usually in the first part of the earning season you do get the better results. I think the impact has been on the small and medium size businesses and that is probably still to play out. Most people I speak to in these industries are still not seeing big turn in trade. It is slowly picking up but nothing great.We are still one quarter away and that is why I am still worried about the earnings prospects in the next quarter. Obviously, it is all about confidence and if the Budget can give us back our confidence to go out there then that would be a pickup in earnings from Q1 of next year.At the moment, we are all sitting saying I can get this cheaper or I can get a home loan cheaper or I can do something cheaper.We will particularly wait for the Budget, it is few weeks away from now. We will see what that brings. So I don’t think earnings are going to pick up considerably in this coming quarter but I don’t think it is going to be a disaster either.Sonia: The one pocket that you have been quite bullish on -- at least over the last many years -- has been these global linked consumption plays whether it is auto ancillaries like Bharat Forge, Motherson Sumi or even some of the global auto companies like Tata Motors. Would you continue to have a positive bias on names like these?A: Interesting -- if you look at some of the auto part makers, if you get – Chrysler announced that they are going to invest a billion dollars into the US manufacturing. So any companies which exports to the US in terms of auto ancillaries are probably going to do particularly well. There are few names which I am sure you know so those are the areas.The dark horse -- I would say and it is probably a second half story -- for this year is probably real estate and I am saying that not that I expect prices of real estate to move up but this is as an underlying trend at the low end of the market which is not going to go away and if Prime Minister Modi’s intent is to have more ownership then this could have a very big fillip for the market going forward. So it is not I am doing anything at the moment but for the second half it is something which could be the dark horse.Anuj: What about NBFCs? I know that you didn’t like the valuations of some of these companies at the highs but are they reasonable now?A: I would probably play more private banks and some of the PSU banks and then NBFCs at the moment. The banking sector is starting to see some lights at the end of a very long tunnel helped by better commodity price. So that is where I would probably play the financial sector at the moment.