China stimulus may suck flows from India; defence & renewable energy are the sectors to watch: Andrew Holland

Holland predicts that IT results will remain poor in the coming quarters

Market veteran Andrew Holland feels expenditure and investment in defence and renewable energy sectors are among the key themes that will drive gains in 2024. In a recent conversation with Moneycontrol's Nandita Khemka, Holland shared why he’s bullish on banks, and also discussed a potential threat from China to emerging market flows.

Below are the edited excerpts from the interview.

Do you see China as a threat for India’s equity markets?

China poses more of a threat to capital flows than to the Indian markets. If they implement a substantial stimulus, restoring confidence in the property sector, China's market becomes highly attractive. Then there might be a significant shift in capital flows from emerging markets to China.

Another factor to consider is the potential impact of incidents like the Suez Canal crisis and tensions between US and Iraq. If these tensions escalate further, especially in the context of the ongoing situation in Gaza, there could be disruptions in the supply chain and a rise in oil prices. In such a scenario, if markets perceive a prolonged inflationary environment, the anticipated rate cuts might be delayed. Consequently, the markets may experience a sudden and significant correction.

Could banks lead the charge in 2024?

For the banking sector, assuming our prediction holds true that the Fed (the US central bank) will reduce interest rates by 25 basis points in March, it's anticipated that the RBI (Reserve Bank of India) will swiftly follow suit, possibly in April, with a similar rate cut. This would alleviate the pressure on banks to aggressively pursue high-value deposits at a premium. Consequently, net interest margins (NIMs) are expected to improve.

This positive development, coupled with increased confidence in the election year and corporate belief in political stability, is likely to spur a resurgence in the capex cycle for private companies. Which, in turn, should lead to a significant rise in the loan books of banks. We hold a favourable view on PSU banks, particularly if the first quarter witnesses a substantial upward movement in the banking sector.

What are the themes you are watching in 2024?

Defence expenditures, renewable energy investments, and premiumisation in both alcoholic and non-alcoholic beverage industries are key areas to watch for potential growth. We are just starting to tap into the growth potential in these sectors. Additionally, the electronics manufacturing industry is set to become a focal point of discussion over the next two years. More local and foreign companies are expected to capitalise on government incentives and the substantial growth opportunities available both domestically and through exports in this sector.

What's your outlook on specialty chemicals and the IT sector?

I am not quite in that camp at the moment, to be honest. Despite the recent underperformance in specialty chemicals, I don't see a compelling catalyst to enter the sector at this moment. Similarly, in the IT sector, we have been bullish because of lower interest rates in the US, but it hasn't changed the outlook over the next six months. IT companies’ results will still be poor. But there’s the expectation of improvement, which the market is banking on. I don't see that for chemicals at the moment.