Investors to look at EMs once Covid's worst is behind: Andrew Holland

Housing and retail sales in the US are already starting to fall, CEO Holland

Most global markets have been on a roll with the economic recovery gaining momentum amid the flush of liquidity. ANDREW HOLLAND, chief executive officer, Avendus Capital Public Markets Alternate Strategies, tells Puneet Wadhwa in an interview the two key matters that may derail market optimism are global tightening by central banks and growth expectations not being met. Edited excerpts:
 
Equities, commodities, inflation, bond yields, and global debt levels — everything is on an upswing. Do you think all this will end badly for global financial markets a few years from now?
 
It's always hard to predict that one event (black swan or not), along with the timing to say when this rise in all asset classes will end badly. For the moment, the markets will continue to enjoy low interest rates; a US Federal Reserve (US Fed) that will live with higher inflation (transitory or not).

 

The two main areas that could derail market optimism are global tightening by central banks and growth expectations not being met. While the debate around inflation and interest rates will continue through summer, it's the second point that may impact earnings more immediately and, in turn, equities and commodities.
 
No doubt as economies reopen, people will travel, spend on experiences, etc, but there are signs that other areas of personal expenditure are starting to wane. Housing and retail sales in the US are already starting to fall. As supply chains pick up, commodity prices may well start to edge lower, leading to growth forecasts being hit. This ‘growth’ shock is not being factored in by the markets, and therefore, can be the catalyst for equities and other asset classes to fall.

 
How long do you see global central banks remaining in the accommodative mode? What about the US Fed?
 
A lot depends on the inflation figures over the next few months as the base effect wears off. While the jobs data is important, it is wage growth that the market will focus on as this usually leads to ‘stickier’ inflation. Our best guess is that a more hawkish US Fed may be heard at the Jackson Hole finance ministers meeting in late August if inflation continues to head higher.
 
Will developed markets steal a march over emerging markets in 2021? How are foreign investors viewing India as an investment destination?

 
Once the worst of Covid is behind us, investors will look at EMs for growth and their focus will be Asia, with India and China seen as the big growth markets for several years ahead.
 
As regards India, is it a good time to take some money off the table?
 
Our fund mainly invests in large-caps but that does not mean that investors should not look below for value. However, given the recent sharp rise in the mid- and small-cap indices, there may be some extra froth in share prices right now. Undoubtedly, there will be winners from this segment but not all companies can be painted with the same brush -- which seems to be the case right now.

 
Growth, value or momentum – what should investors chase now? In which sectors and stocks do you find these three in ample measure?
 
While there will be swings between each of these themes, we look at companies that will do well irrespective, because usually, a fast-growing, well-managed company with pricing power will fall within all these themes, whether growth, momentum or value.
 
Is it a good time to buy the ‘unlock trade’ — stocks of hotel, aviation, quick service restaurants (QSRs), autos, etc.?
 
Yes, we like this space and feel that as sectors open, they will enjoy a brief period of pricing power, which along with operational gearing, will lead to a massive increase in profitability.

 
What is a realistic assessment of corporate earnings growth in FY22? Which sectors and stocks can surprise positively and negatively?
 
We think 20-25 per cent earnings growth should be achievable in FY22 with the banking sector likely to surprise on the upside. Pharma and metals still have room to show strong earnings growth and, therefore, share prices can continue to see upside over the next one year. That said, we still feel the energy, banking, industrials, and consumer discretionary sectors will lead the way.
 
Can the second Covid wave further dent banks’ asset quality?
 
The banking sector came into the second wave much better prepared and has the balance-sheet strength to move through this slowdown. The concern though remains of a potential third Covid wave. Therefore, the vaccination rollout will be the key — not just for the banking sector but for India Inc as a whole.