No triggers to propel the economy in the next three months: Andrew Holland

Back home, it is the liquidity and funding problems that pose a challenge, he says

With the interim Budget out of the way, the risks to the Indian markets are more global in the next few months. Back home, it is the liquidity and funding problems that pose a challenge, Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies, tells Puneet Wadhwa. Edited excerpts:
 
What is your assessment of the interim Budget proposals?
 
I like the farm income support measures, though the amount was on expected lines. That said, in terms of how they have done, it has been more innovative than a vanilla farm-loan waiver. Then there are sops for the middle class. Individual taxpayers having taxable annual income up to Rs 5 lakh will get a full tax rebate and therefore, will not be required to pay any income tax. Whilst on the face of it, it is positive, it’s too small an amount to move the needle too much. For instance, I don’t think this would lead to people rushing to buy high-end cars or bikes.

 

There are also proposals for the real estate and the housing sector, but I am not convinced that it will significantly change things for the housing sector in any way. While cosmetically the proposals look good, the ground reality is quite different and may not change very much. Overall, the budget deficit seems fine but the borrowings by the government are huge for the next year. This will likely keep interest rates elevated and as a consequence, problems for the real estate sector and non-banking financial companies (NBFCs) are not likely to go away.
 
What were the hits and misses then?

 
It was difficult for the government to do too much in the interim Budget. Excessive populism would have hurt market sentiment. Overall, it has been an okay budget. That said, there is nothing which will propel the economy in the next three months.
 
How do you see the markets play out between now and the election outcome?
 
It is too early to call an outcome of the general elections and as always we will go back to the fundamentals of the economy. In our view, bond yields are likely to remain elevated, and this will put more pressure on the real estate and the NBFC sectors. This alone will keep markets volatile.

 
How are foreign investors viewing India as an investment destination now?
 
India is one of the worst-performing markets this calendar year (CY19). Since there have been flows to the emerging markets, we have been getting flows as a result. If the risk-on trade will come, it will be on the basis of the fact that the interest rates will not go higher. This will help EMs like India. Even during CY18, some of the other markets were down in the range of 5 per cent to 35 per cent; valuations are now better there.
 
Foreign investors may also think that the US and China may arrive at a consensus or deal. In that case, it will be the exporting EMs like South Korea and Brazil that will stand to benefit. Hence, we will get money from foreign investors, but not a huge chunk in the short term.

 
What are the key risks — domestic and global — for the markets hereon?
 
The risks to the market are more global in the next few months. Back home, it is the liquidity and the funding problems that pose a risk rather than anything else.
 
What are your estimates for corporate earnings growth in FY19 and FY20?
 
Corporate earnings should grow around 15 per cent to 20 per cent in the financial year 2019–2020 (FY20). The base case is that there will be no change in the policies already implemented. So, if we get more of the same, private capex will pick up in the second half of the year (H2CY19). This will help boost earnings. Government spending and domestic consumption will remain good and if the private capex also gets going, that will be an extra boost for the earnings.

 
Your overweight and underweight sectors?
 
We still like FMCG and private banks. The information technology sector is also a place to hide. One needs to focus on individual stocks now and not sectors. On the other hand, we do not like NBFCs and autos.
 
Do you expect the Reserve Bank of India (RBI) to cut rates in the upcoming policy review?
 
I expect the RBI to cut rates by 25 basis points (bps); probably would have said 50bps. However, the government borrowing programme may mean the RBI gradually reduces rates. For the rest of the year, interest rates could head further south if our view of a global slowdown takes place.