 "Current market levels are certainly not for chasing stocks: Andrew Holland")
After a rally in March, the first few trading days in April have brought back uncertainty and nervousness into the markets. Andrew Holland, chief executive officer, Ambit Investment Advisors, tells Puneet Wadhwa that the Indian markets could remain volatile and will be more aligned to sentiment across global markets. Edited excerpts:
What is your outlook for the markets for the next three to six months, now that the Reserve Bank of India's (RBI's) monetary policy review is over?
We're approaching the March quarter earnings season, which at some point will impact or determine the market movement. Here, the banking sector has its own share of problems and the markets might start to worry about this again.
Second, there are global factors and liquidity, which we saw coming through in March from the European Central Bank (ECB) and the US Federal Reserve (Fed), in terms of what they did and said in their last meeting, is starting to wane again. So, the markets might start to worry again about the problems facing the global economy.
So, do you expect range-bound movement again or could the global markets (including India) dip to or even below their recent lows?
I think the Indian markets will be more aligned to what's going on globally. So, if the markets start to again worry about the global economy, as they did in January and February 2016, the obvious question is what more can the central banks do?
My base case is that this is a corporate profits recession than an economic recession. What this means is that valuations can be crunched lower, without necessarily going into an economic recession. One reason why the markets could retrace some of their gains.
Our main concern, though, is that if the global markets do get back to their January/February lows, we might lose confidence in central bank policies and their ability to bring economic growth. So, the global factors are more of a concern than what we are seeing in India. Going ahead, I expect the markets to remain volatile. India itself doesn't have any massive catalyst to take these higher at the moment.
What about the domestic issues like pending bills/reforms and the coming state elections?
Well, we still have the Parliament session that will re-open soon and the coming state elections. I don't think anyone has yet focused their minds there yet or even on passage of the goods & services tax bill. There is a lot of foreign press now questioning whether Narendra Modi's reign has actually done the changes he should have. That has started to impact foreign institutional investors' sentiment as well.
What's your advice to someone who wants to invest from a year's perspective? Is it a good time to invest or can they get stocks cheaper six months from now?
The current market levels are certainly not for chasing stocks, due to the potential volatility that is likely to hit the markets again.
What are your expectations from March quarter corporate earnings?
I think, again a mixed bag. There will be more surprises in the banking sector on the downside. There are still a lot of problems there. Weakness in the pound will also see a mixed performance from companies in the information technology sector and will impact those who earn significant revenues in that currency. While we have seen a pick-up in stock prices, I don't think the metals pack will deliver in terms of earnings, either. I am more optimistic on automobiles and cement, where one can see the supply side as well.
Some experts believe the US could be headed into a recessionary phase in the next couple of years.
Data is not pointing to that right now. It is more like a recession in corporate profits than an economic recession. The benefits of wage productivity, low interest rates and share buybacks have played out and top-line growth is muted. Therefore price to earnings ratios might contract on account of this slower growth. US Fed chairperson Janet Yellen has given some very mixed signals over the past three months and this leaves us a little in no-man's land as to what monetary policy and data points they are following.
What about commodities - metals and oil? Is the worst over?
We don't believe the worst is over yet. China is still slowing and metal prices have retracted quite a bit of their recent gains over the past month. For oil, all eyes will be on the Doha meeting. Everyone is hoping for a cut (in output) but we feel it might not happen. Indeed, Saudi Arabia has already stated that it will not change its stance on production until Iran does. Therein lies the problem.
What is your outlook for the markets for the next three to six months, now that the Reserve Bank of India's (RBI's) monetary policy review is over?
We're approaching the March quarter earnings season, which at some point will impact or determine the market movement. Here, the banking sector has its own share of problems and the markets might start to worry about this again.
Second, there are global factors and liquidity, which we saw coming through in March from the European Central Bank (ECB) and the US Federal Reserve (Fed), in terms of what they did and said in their last meeting, is starting to wane again. So, the markets might start to worry again about the problems facing the global economy.
So, do you expect range-bound movement again or could the global markets (including India) dip to or even below their recent lows?
I think the Indian markets will be more aligned to what's going on globally. So, if the markets start to again worry about the global economy, as they did in January and February 2016, the obvious question is what more can the central banks do?
My base case is that this is a corporate profits recession than an economic recession. What this means is that valuations can be crunched lower, without necessarily going into an economic recession. One reason why the markets could retrace some of their gains.
Our main concern, though, is that if the global markets do get back to their January/February lows, we might lose confidence in central bank policies and their ability to bring economic growth. So, the global factors are more of a concern than what we are seeing in India. Going ahead, I expect the markets to remain volatile. India itself doesn't have any massive catalyst to take these higher at the moment.
What about the domestic issues like pending bills/reforms and the coming state elections?
Well, we still have the Parliament session that will re-open soon and the coming state elections. I don't think anyone has yet focused their minds there yet or even on passage of the goods & services tax bill. There is a lot of foreign press now questioning whether Narendra Modi's reign has actually done the changes he should have. That has started to impact foreign institutional investors' sentiment as well.
What's your advice to someone who wants to invest from a year's perspective? Is it a good time to invest or can they get stocks cheaper six months from now?
The current market levels are certainly not for chasing stocks, due to the potential volatility that is likely to hit the markets again.
What are your expectations from March quarter corporate earnings?
I think, again a mixed bag. There will be more surprises in the banking sector on the downside. There are still a lot of problems there. Weakness in the pound will also see a mixed performance from companies in the information technology sector and will impact those who earn significant revenues in that currency. While we have seen a pick-up in stock prices, I don't think the metals pack will deliver in terms of earnings, either. I am more optimistic on automobiles and cement, where one can see the supply side as well.
You have been bullish on Reliance Industries (RIL) and Maruti Suzuki since quite some time now. Is it a good strategy to invest in the oil & gas and automobile sectors?
We changed our stance on Maruti some time back as the tailwinds that Maruti was enjoying in the past through Yen depreciation have changed. Though the Yen depreciation has not become a headwind as yet, it will not help margins as much as it did in the past. So the company will go back to its normal competitive line-up of new vehicles. In the automobile segment, we have now more moved towards the two-wheeler pack, where valuations are more compelling now.
As regards RIL, we are still waiting for the launch of their telecom venture (Reliance Jio). While we were bullish on the stock – and the strategy has paid off well – we still are a little more neutral in the short term. We would like to see what the company does, partly because if RIL goes for very aggressive telecom pricing, it could impact cash flows.
Some experts believe the US could be headed into a recessionary phase in the next couple of years.
Data is not pointing to that right now. It is more like a recession in corporate profits than an economic recession. The benefits of wage productivity, low interest rates and share buybacks have played out and top-line growth is muted. Therefore price to earnings ratios might contract on account of this slower growth. US Fed chairperson Janet Yellen has given some very mixed signals over the past three months and this leaves us a little in no-man's land as to what monetary policy and data points they are following.
What about commodities - metals and oil? Is the worst over?
We don't believe the worst is over yet. China is still slowing and metal prices have retracted quite a bit of their recent gains over the past month. For oil, all eyes will be on the Doha meeting. Everyone is hoping for a cut (in output) but we feel it might not happen. Indeed, Saudi Arabia has already stated that it will not change its stance on production until Iran does. Therein lies the problem.