Indian Markets Appear Expensive, Warns Andrew Holland
On Thank God It’s Friday, we spoke to Andrew Holland of Ambit Investment Advisory.
This week on our new series ‘Thank God It’s Friday’, we spoke to Andrew Holland, chief executive officer at Ambit Investment Advisory on his views on the markets, the upcoming monetary policy in August, how a potential rate hike in the U.S. will affect India.
How a Fed Rate Hike Will Impact India
With the U.S. Federal Reserve and Bank of Japan meetings behind us, what do you think will drive Indian markets going forward? How would you be positioned on India when the Fed finally hikes rates? And what would it mean for foreign portfolio outflows? Would you buy into any volatility or correction?
India’s valuations, at 19 times one-year forward PE, are stretched. All global markets have been rising because of easy liquidity. The Bank of Japan announced a stimulus package today. Next week we should see some fiscal measures, which I think are more important. Fiscal measures are more important to get GDP growth globally moving.
I am not sure that the Fed will increase rates this year. I still think that Europe is going through a slow time. Everyone’s saying that if Europe slows down, it doesn’t effect U.S., it doesn’t effect China. These are the biggest trading blocks in the world. I can’t believe it won’t have an impact. So I suspect that the Fed will be cautious. We have some good data. So it will be a little less dovish now. That’s not to say that it will raise rates very quickly. I think it could be next year.
Twenty three companies, which form 63 percent of the Nifty’s market capitalisation, have announced results. From the way this earnings season has panned out so far, do you think your Sensex FY17EPS estimate of Rs 1,550 will be met?
Last quarter, we got a little optimistic about how the markets moved. The analyst community went out and said we are going to see 15-20 percent earnings growth for the year. We have always been at 5-10 percent.
If the monsoons are what it seems to be, although it’s getting a little bit patchier, then you may see an upgrade in earnings between 10-15 percent. That’s why we have said valuations fundamentally are a bit stretched and that’s because liquidity has pushed the markets higher than where they should be at the moment. The earnings season so far has not been great. It’s been quite disappointing actually.
Will Rajan Cut Rates in August Policy?
In about 10 days from now, we have the Reserve Bank of India’s monetary policy meeting. Do you think Governor Rajan will deliver a rate cut before his exit? What’s your stand on interest rates in India?
Even before Raghuram Rajan was leaving, India had the potential to reduce interest rates by another 50 basis points. Given where bond yields are, and where the markets are globally, I think that’s definitely on the cards. Will he do it during his tenure or wait for the next RBI governor, I don’t know. We will wait for him to take that call himself. But he can do a 25-50 basis point cut.
Worst Over For Commodities?
Do you believe the commodity cycle has bottomed out? Is the worst over for crude oil and metals?
I am not convinced that the cycle has started to pick up. All we have seen over the past year is GDP forecast coming down drastically across the world. More recently, oil prices have started to contract again. So that tells me that maybe the global economy is still suffering and liquidity is helping. Negative rates and GDP growth don’t seem to go hand-in-hand. With it, metals and oil could be under pressure going forward. Interestingly though, a few weeks ago, China was supposed to be taking action over its steel capacity because they have overcapacity. All of a sudden, they increased import duties on steel. Maybe we’ll see some dumping again in the future.
Bullish on Pharma?
Which sectors do you find attractive now? Any pockets where you are seeing value currently?
That’s one of the hardest things at the moment. At 19 times forward price-to-earnings, it’s hard to see value. Where we did find value a month-and-a-half ago was in the pharma sector after U.S. FDA notices on pharmaceutical companies across India. So we started to buy into the sector because we saw value there, and that’s really paid off well.
Cautious on IT Sector?
What’s your stand on the information technology space after first quarter earnings, given that management commentary suggested caution following the Brexit vote?
About two years ago, our view on the IT sector was that the decade of growth which the sector has enjoyed was over, and it’s going to become more competitive going forward. That’s exactly what we have seen. We have seen a lot of changes in managements as companies cope with the new environment. Obviously with new, disruptive technology coming in, it’s going to become more and more difficult. So for the sector as a whole, would you pay 15-16 times for slowing growth? It’s probably more commodity, utility type ratings that you should be looking at. So we have no reason to be in the IT sector at the moment. In particular, ahead of the US elections where I am sure there will be a lot of rhetoric around visas and people being able to come into U.S. So that would be a negative for the sector in the very short term.
What would change my mind and make me a little more excited, apart from valuations coming down, would be the amount of cash they gave to the shareholders through dividends or buybacks. That would probably make me look at the sector a bit more. At the moment, I would just avoid it.
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