The markets may fall 15 per cent from the current level, Andrew Holland, CEO, Institutional Equities, Ambit Capital, tells Vandana. The former strategic risk group head at DSP Merrill Lynch says the dollar is going to strengthen and its carry trade could be over by the first quarter, to be followed by an outflow from emerging markets. Excerpts:
The markets have been volatile in recent weeks. Do you see a deeper correction ahead?
We have been expecting a deeper correction for some time, as fundamentally, markets have risen too quickly globally. But, it hasn’t come. Every time there has been a correction, the strong global liquidity has pushed markets back up again.
Fundamentally, the question is if the stimulus packages that have been announced globally are starting to show a discernible trend. The worst may be behind us but I am a little sceptical about the scale of the recovery — U-shaped, V-shaped or W-shaped? I still err towards a U-shaped recovery, which markets are not predicting right now.
The other important issue is the weak dollar. Consensus thinks the dollar is going to continue depreciating and therefore the dollar carry trade is pushing investors towards buying gold and emerging markets. There used to be a carry trade on Yen when the yen was at 120. Now, it is at 88. Things can change. I think the dollar carry trade could be over by the first quarter. If this is correct, the dollar is going to strengthen. The weaker the dollar, the higher the US deficit. So, a weaker dollar and higher oil and commodity prices do not make sense to me.
Once this carry trade reverses, funds will be quick to withdraw money from emerging markets. We might see even more volatility for markets in the first quarter if this happens.
What is your take on valuations? And where do you see the Sensex by the end of the year?
Fundamentally, all markets look overbought from a valuation standpoint. That said, we have recently raised our Sensex target range from 13,000-17,000 to 15,000-19,000. For FY11, we are predicting a Sensex EPS of Rs 1,000, leaving the market trading at a multiple of 17 times March 2011, which is fair value in our view. From a long-term perspective , two-three years are fine. But from a short-term, liquidity-driven market, I am more nervous. I don’t see it going too high in the short term. Correction, when it comes, will probably be more severe than what people expect. I would say a minimum 15 per cent correction from these levels.
How is the global picture looking?
If one looks at the states, some of them look very good. Like the store-sales data in the US and the UK. But my question is, if you shut 900 stores, the same-store sales would of course be higher. Commodity prices have risen everywhere and someone, somewhere has taken a margin hit. The near-term headwinds are Asian countries worrying about their own currencies appreciating and what would be the policy response to it. So, could we see higher interest rates? That’s a dilemma, because higher interest rates mean stronger currency.
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We saw over $15 billion worth of FII inflows. How do you see this?
The India story is on track. India is probably decoupled from an economic point of view. Institutional investors understand that over the next 10-15 years, Asia will be the place to be. People have waken to the potential of India and China. It is not hard to sell the India story anymore. The pension funds and long-only investors are fine with short-term blips if there is a case for the index touching 40,000 in the next three years. But the hedge funds of the world are a bit more proactive. For them, valuation is a concern. If the dollar continues to weaken, we will see inflows. FIIs will be quick to book profits at any sign of a correction.
Which are the sectors where you see a lot of growth?
The consumer sector certainly looks very attractive. Infrastructure is another sector which we like, and within infrastructure, anything to do with building roads looks good.
If you look at the capital goods sector, share prices tend to increase on the order book. It is going to be the same with road building. Telecom is a nice sector, but headwinds are strong in terms of ARPUs, (average revenue per user) competitors and 3G (telecom), which make me neutral in the short term. But the next few quarters are a great time to buy it. Valuations are quite expensive in the power sector. In financial services, the only area of immense interest is insurance.
How do you see the Dubai debt fiasco impacting markets and corporates?
The financial impact of Dubai has already waned, as exposure to the banking system was small and mainly concentrated to European banks. However, it did give us a warning shot that there is still risk out there and we cannot be complacent.
