Market breadth has been really weak: Avendus Capital's Andrew Holland

A small number of stocks have led the indices higher rather than a broad-based rally, Holland said

It is time to be cautious as markets are ignoring risks on the horizon, says Andrew Holland, chief executive officer (CEO), Avendus CapitalAlternate Strategies. In an interview to Samie Modak, on the occasion of the launch of India’s first ESG (environment, social and governance)-based fund, Holland explains his investment strategy. Edited excerpts:

Q: Benchmark indices are at an all-time high. Where do you think the markets are headed from here?
 

A: For the near-term we are cautious. There are lots of moving parts that can impact sentiment negatively. The market seems to be ignoring some of them. There is a trade war with China, there are problems that are happening in countries, like Brazil, Turkey and Argentina, which the markets seem to be ignoring for the time being. Even if one takes a more optimistic view that there is no trade war between US and China and the global outlook remains strong, it would mean that the rate hikes will rise more than anticipated. This will again be a negative for the emerging markets (EMs). In that scenario, commodity prices will rise, which again is bad for India. So whichever you look at it, the markets will take some kind of hit. India is relatively better placed as it doesn't have some of the problems of its EM peers. But if globally things turn negative, you will see money move out of India as well.

Q: Despite headwinds such as currency weakness and global trade war fears, the markets have seen a sharp up move. Why do you think has triggered the latest risk-on?

A: Currency markets have been volatile but bond markets have been fairly stable globally. That has played in favour of the equity markets. But the market breadth has been weak. If you compare stocks now with January highs, the number of stocks below their one-year highs as a percentage of total stocks is a lot. It has been a small number of stocks that have led the indices higher rather than a broad-based rally.  Most sectoral indices too are way below their one-year highs, which shouldn’t be the case if the markets were really booming.

Q: Lot of ETF money is coming into the market. Is there a risk that the markets could see a sharper fall if these flows reverse?

A: ETFs in India are still quite small. But globally it can be a big problem and it will have a cascading effect elsewhere. ETFs don't buy only five stocks, they have to buy an index. However, given the way markets have gone up, the weightage of some stocks has increased. So we are seeing a concentration in buying some of these stocks. Therefore, if there is a sell-off, the fall could be exacerbated.

Q: In the past you have aggressively moved towards cash. Can you share your investment approach?

A: It is not about cash, it is how you manage that fund. One of the things we have hold investors, apart from trying to generate 15-20 per cent return, is that our fund will try to protect capital first. It doesn't matter how the markets do. We are not chasing the market returns. So at times when risks are high or there are several moving parts, we go to cash to protect capital. Currently, we are about 60 per cent cash. The cash levels keep on changing. In January too we were 60 per cent cash. After the markets fell in February and March, we put some money to use and our cash levels dropped to around 20 per cent.

Q: What kind of correction are you waiting for to deploy the cash?

A: As markets fall then we can start deploying. Our investment committee meets regularly to take a short- medium- and long-term view on the market. Depending on whether it is bullish, bearish or neutral, we decide how much deployment has to be made in the markets. It is a more procedural thing.

Q: Mutual fund (MF) inflows have been strong. A lot of this money is eventually coming into the market. Do you think aggressive MF buying is creating valuation imbalances?

A: I think it is easy to say that. I haven’t done any analysis. If I just work it through, you had those imbalances working against you when MFs were doing the recalibration of different funds. Now, when they are coming back, they want to buy the best. The best stocks aren’t getting any cheaper.

Q: How much returns will the benchmarks deliver over the next one or two years?

A: Earnings momentum is picking up. We expect earnings growth (for Nifty companies) to be 15 per cent growth in 2018-19. We expect growth to accelerate in 2019-20. Our view is that the market returns will be in line with earnings growth. But sometimes the market overshoots and sometimes they undershoot.

Q: How will elections impact the market?

A: There are lots of views going around. We will just wait and watch and make use of whatever opportunities that are available.  For instance, last General Elections between the polling and exit polls, we increased our cash levels to 85 per cent. Once the exit polls were announced, you know what strategy to choose to go in the market.

Q: What is the reason for the growth in the alternative investment funds (AIF) industry?

A: AIFs have given wealthy investors a new asset class to invest in. We only had debt and equity, there was nothing in-between. So either you take a lot of risk and or no risk. What the hedge fund industry has done is, take you along the curve. So if your risks appetite is lower than equity, you have something like an Avendus Enhanced Return Fund, which targets high alpha and low beta. If debt returns are going to be six per cent, this fund tries to deliver up to four percentage points higher.