Q2 earnings to be the next catalyst; IT may see more downgrades: Andrew Holland

Andrew Holland, CEO, Avendus Capital Alternate Strategies

In the midst of a volatile global economic landscape characterized by surging bond yields, rising oil prices, and a strengthening dollar, market analysts express concerns about the short-term outlook.

In an exclusive conversation with Moneycontrol, Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies says the data is sending mixed signals, contributing to market uncertainty.

Furthermore, he adds that there is a lack of a clear catalyst to stabilize markets, but the upcoming earnings season will be the next catalyst for the market.

Additionally, he talks about the sectors that might be poised for growth, such as defence, beverage, and electronic manufacturing, and the potential boost to sectors like hotels, aviation, and beverages during the World Cup.

Is there more downside amidst unfavourable global environment like surging bond yields, flare-up in oil prices and a surge in dollar?

Yeah, I think the outlook is more to the downside in the very short term. It is really messy out there. One day, we have a jobs report, which is very negative, and the next day, we have a jobs report, which is a little more positive. So, the data is not convincing either way. I think that is what is bringing volatility back to the markets.

To my mind, when you see the yen, 150 to the dollar, the oil price looks as though it's going to start increasing as well from here on. The feeling I get now is that our markets don't have that catalyst. Earnings could be the catalyst to at least stabilise the markets from where we are. The global factors are going to play more negatively on our markets in the short term. Don't forget that the US markets are nearly 7-8 percent down from the highs. We haven't really fallen as much as global markets from the highs that we saw back in September.

The earnings season kicks off next week. What are your thoughts on the IT pack? Accenture has recently come out with its guidance and it hasn't been all that encouraging. The consensus view on the Street was that IT companies may see some bit of a recovery from the last quarter of the current fiscal. What is your take?

I think there's probably some more earnings downgrades to come. I think the IT pack has benefited from the kind of recovery in Nasdaq, fuelled by AI-led stocks. Thereafter, we've had a few big deal wins for some of the companies. That has helped sentiments in the short term.

I can't imagine that the commentary is going to be any more positive when the results come out. So, it's a sector to hide in if you think markets are falling because, you know, a lot of the news is in the price.

Probably, you are going to see downgrades of up to 5 percent or so from where we are today and that will probably just help the share prices to either hold where they are or come off a little bit. There are two things you have to look at here, it's not just the near-term earnings. When do you expect interest rates to start falling? If you think that's the back-end of the year into 2024, the IT sector is worth looking at now as these bad results or poor commentary comes out this quarter. So that's what I would look at -- rather than think about where we are today, I would look at what could happen in the future with lower interest rates. That's what's gonna fuel the share prices of these companies.

Which sector do you think could be an outlier in the second quarter of the earnings season?

I think the big one, the big sector, which is going to be a driver for our markets is the banking sector. I say that because when we hit those highs in the market a few weeks back. One of the factors that brought sentiment back down more negatively was the brokerage commentary on HDFC Bank.
The question mark over net interest margins (NIMs) for the rest of the banks is out there. The commentary from the banks will give us a good idea of this competitive landscape on getting deposits and really what's happening with the interest margins. Is that going to have a big impact on the earnings, going forward? Yes, you're getting loan growth, but at what price are you getting that loan growth? So I think that's going to be the big factor. I think this quarter is going to be the banking sector. All the other sectors will probably be in line. There'll be a few outliers here and there in terms of stocks. But banking will be the key focus for this quarter.

As we step into the election year, which pockets would you be invested in?

Defence continues to be on our radar. Defence spending is not going away. Capex spending is not going away. Companies are doing well on the back of order wins rather than execution. We’ll see execution down the line in two to three years’ time. That's always been a problem area for these types of companies.

I think if you work on the basis that order wins will drive share price in the short term and you expect more of them, the sector will continue to do well. The other themes we like is the beverage sector, both alcohol and non-alcoholic, as everyone moves up the premium ranges across the board and electronic manufacturing companies.

I think that's just the start of the runway there and there's a huge amount of growth to go forward. Of course, it's more a kind of midcap stocks, but it's a great sector to be involved in.

The World Cup cricket season has kicked off and sectors like hotels, aviation and beverages stand to benefit. Are these sectors set for a re-rating?

In the very short term, all of these share prices will run up, because I'm sure we'll start hearing about how much people are spending and enjoying themselves as well. Whether it's fast food or drinks or hotels or aviation, I think that's going to be a boon for the next month or so and you're going to see some very, very good profits from this kind of world cup fever.