What's Causing The Current Market Jitters? Andrew Holland Explains
Defence, railways, infrastructure, and renewable energy we will see a lot of growth going forward, according to Holland.
Multiple triggers, including regulatory actions, high valuations, the recovery seen in China, and the ongoing earnings season, are contributing to the nervousness in the markets, according to Andrew Holland, chief executive officer at Avendus Capital Public Markets Alternate Strategies LLP.
China is actually seeing some recovery in terms of sentiment, and a lot more brokers are becoming positive on China, Holland told NDTV Profit in an interview. This is possibly taking off flows from India to China in the short term, keeping in mind the cheaper valuation in the dragon nation, he said. "People don't want to miss the China ride if it's going to happen."
The increasing regulatory actions by the Reserve Bank of India are causing uncertainties that markets don't prefer, Holland said. "I can see the reasons behind it, and it's good for the long-term health of the sector. But short-term, it gives that uncertainty of what next and finds there be something else that's going to come out."
The financial sector was starting to outperform, and then this extra regulation dampened the sentiment, Holland said. "Markets don't like uncertainty, and therefore you are seeing the volatility."
On the ongoing Lok Sabha elections, Holland said that the current market has already priced in the flows that were seen late last year.
The current earnings are mostly in line with estimates, with no big surprises, the CEO said. The two sectors that markets expected to there would be bottoming up were banking and IT "If that was the case, then that would be the catalyst for the markets to move higher."
The information technology sector has not reached the bottom yet, and with rates at the year-end, there is no tailwind. Meanwhile, the banking sector is up as net interest margins have normalized, Holland said.
Sectors About To Outperform
In the FMCG space, markets are excited about the commentaries from companies that rural economies are going to start picking up in the second half of the year.
"If you want to play premiumsation I would go for the beverages sector rather than the pure FMCG sector. I don't think I'm buying into the whole rural economy's spending.
Defence, railways, infrastructure, and renewable energy, we will see a lot of growth going forward, according to Holland.
Watch The Full Conversation Here:
Edited Excerpts From The Inteview:
Andrew, what really is making investors a little wary. You're seeing that in fund flows, the kind of bets that are being made. Is it more a question about waiting for June 4 before bringing in any fresh money?
Andrew Holland: So there are a few things. it's all very good points you've made and I think you're right in the terms of ticking the box.
You know, some of the voter turnout has been a bit lower than maybe what was expected, because, obviously, the weather's so hot and of course, both sides of the markets juggling around—is that good or bad for the opposition or the incumbent parties. And I think, that's what's making the market a little nervous at this point.
I think the second point is, China has actually seen some recovery in terms of sentiment and you are seeing a lot more of brokers now becoming more positive on China and I think that's taking some of the flows to China, possibly from India, in terms of the very short term. So I think that's a factor.
And of course, you know, the market compared to ours is, in terms of valuations, a lot more cheaper. So I think, people don't want to miss the China rise if it's going to happen and India's had a great run and we have the election. So, sit on your hands, wait and see what happens, tick the box afterwards.
I think the final factor has been the earning season. The two factors that we were looking at for the earning season was would IT and would banking kind of finally show that the worse is behind us. And if that was the case, then obviously that would be a catalyst for the markets to move higher.
On IT, I think the jury's still out there. I don't think it's reached bottom yet and with interest rate cuts likely in the US later in the year, there's no tailwind.
For the banking sector there, I think that the NIMs seem to have normalised and that's why we're seeing the banking sector up.
The final factor—which is kind of spooking the market in the short term—is some of the regulatory changes that the RBI is making—whether it's for single banks, whether it's for loans, for construction going forward. So that's the regulatory part, which the markets aren't liking at the moment.
How real is this China factor? There is no data to support the hypothesis of a Chinese economic revival yet. Do you think there is enough there and you're seeing the green shoots?
Andrew Holland: You know, if you go to the US for example, all the data points that we get are so mixed, that we keep flip-flopping around on interest rates being earlier or later in the year.
With China—where it's even more difficult to get data—I think the market is saying that we've reached a bottom. The authorities there, kind of with the banking sector, have kind of stabilised the property market now.
Now, you still need confidence to come back. But the fear is that the market is so cheap for investors that if you miss the kind of first rise in the markets, then you could be chasing the markets for some time. So I think that's the fear factor of missing out on a China re-rating.
So I think it has stabilised. I think the data I've seen has been more stable. Obviously, inflation or disinflation there is still taking hold. So they do have the ability to reduce rates over the next quarter, and I wouldn't be surprised if that currency continues to depreciate against the US dollar, again, which would help exports going forward.
So I think that is the China story as such. And I think it's probably touched the point, where valuations are cheap enough to dip your toes, which is what we are seeing foreign investors do.
What about valuations in the Indian market? Is that why we're also seeing some of those concerns or weariness, Andrew, because valuations have run up? Have the corporate results for FY24 and Q4 lived up to justify those valuations?
Andrew Holland: By and large, the overall results season has been kind of in line. I don't think there's been massive excitement in any particular sector.
I think, the banking sector is probably the standout for me. But overall, from what I've seen, earnings are up about 14% and that's in line with our kind of 10–15% earnings growth for the year.
So there are no big upgrades like what you've seen in the past. And I don't think we'll see those upgrades till the back end of the year, as a multiplier effect of all the government spending—which will happen over the next six months after the elections—will start to feed through to the economy.
So I think, those are the factors that will increase earnings. At the moment, there's no real catalyst in the market to push the earnings growth higher at this point, which would mean that valuations come down.
So I think, we're kind of in that neutral zone ahead of the elections. I don't think there's anything that's going to push the market. I thought the banking sector would, because it's such a huge weightage and if anything is held the market up rather than probably would have seen it could have go down.
So, I think people have been taking money off the table a little bit, just to be wary, but there's a lot of money still on the sidelines that want to come into the market. I think everyone is just waiting for the elections, as you said to tick the box and say, well, we can move forward.
Do you think that the tax treaty or tax revision rules in Mauritius, which came in few weeks ago is still weighing heavy on FIIs? The fact is that nothing can be done about it because there's an election underway. Any decision can be taken only after June 4. Is that still a problem?
Andrew Holland: Not from what I've been picking up. It's been there for some time and a lot of funds had moved to other jurisdictions. Obviously, GIFT City is something that you know, India will push as a jurisdiction going forward for foreign investors.
I think just on the tax side, though, I think the thing that we're picking up time and again is that after the elections, there could be some tax tweaks, particularly to capital gains tax, probably, you know, an arbitrage fund tax going forward.
So, I think that's probably why the markets are kind of getting a little bit worried about, maybe not only the elections ticking the box, but what happens in the next budget, and will there be any changes in the capital gains tax because you can't fund all of your expansion just through equities, it is got to be debt as well.
So let's see if there is any normalisation towards those tax rates, which are very, very far apart at the moment.
You think that markets are unlikely to show any big movement before June 4. I was wondering why, because for the last several months—since the December assembly elections last year in five states—the markets seem to have priced in policy contiguity. Why the trepidation now?
Andrew Holland: I think, it's just that the markets had such a good run in that November-December period, coming into the year, that it probably took that kind of pre-election rally into the back end of 2023 and therefore, what are the catalysts if we're all saying that it's a policy continuation? Then we'd have to wait and see what those policies would be, alongwith what the budget would be.
And I think that's what the markets are just a little bit nervous about—those possible tax changes in capital gains tax.
On Monday, Britannia responded a bit surprisingly to the numbers. They were good, but were they that good? ITC, HUL, Marico, Godrej Consumer—it seems as if perhaps the market is rediscovering FMCG. Is that the way you're looking at it? Were you surprised?
Andrew Holland: See, it's been a very unloved sector, for the past year or so. The two negatives have been that there's been no volume growth and rural spending is too slow, or it is kind of underwhelming.
And of course, companies have come back and surprised on two fronts—one, margin was a bit better than the market was for baking in and second, the rural economy starting to pick up.
So where would you go for safety in the market, in terms of the volatility? Do you go to IT, which is still struggling to get through to the bottom of the kind of earning cycle, or do you now go to FMCG, where you have three factors—margins are good, rural economy is picking up, it gives you the volume growth, and premiumisation which we talked about a number of times in the past.
Those are the three factors which you say okay, if I want defensive, let me go now for a consumer which has been unloved and it's probably underweight by most funds. And that's probably why you've seen the share prices rise so quickly because there's been no real buying. Everyone has just forgotten about the sector. It's a bit like pharma. Everyone's forgotten about the pharma sector.
The primary issue with FMCG was stagnant rural consumption. Not all companies are focusing completely on premiumization. Is anything really changing at major players like ITC, HUL, Britannia, and Nestle? Are markets betting on post-election rural spending boost?
Andrew Holland: That's what the markets are now getting more excited about. It is the commentary from these FMCG companies that the rural economy is going to start picking up in the second half of the calendar year and therefore, you know, that's where you get the volumes and and obviously that the margin improvements.
I think if you want to play premiumisation, I would probably go for the beverages sector rather than the just pure FMCG sector. As I said, it has just been unloved and I think you are just bouncing from the bottom of an unloved sector. I don't think I'm a buyer in this whole kind of rural economy spending and these companies doing better.
I think there are some kind of special companies in terms of the corporate action that's happening. I mean, obviously, ITC will be, you know, divesting of its hotels at some point.
Then, if I look at Hindustan Unilever, Unilever Overseas is obviously under some kind of pressure to do something with the businesses from activist shareholders. So we could see a little bit more action within the sector. But those would be the only catalysts I could see.
I think it is a bit early to say that the rural spending is going to pick up and they're going to see this double-digit growth, which everyone's now kind of backing. Two weeks ago, no one will tell you that.
Regulatory action has become the single-largest headwind for companies in the BFSI space—whether it's SEBI, RBI, whether it's a problem with IT, or draft regulations talking about higher provisioning. Has that made you a little wary of this entire space?
Andrew Holland: Yes, it does. I mean, I can see the reasons behind it. Obviously, it's good for the longer term, kind of health of the sector because you don't want kind of unsecured loans kind of ballooning and then some problem in the economy. You know, that's what the RBI wants to kind of fight against, given past experiences.
So I don't think it's a bad move in the longer term, but short term, it just gives that uncertainty of what's next. Could there be something else that's going to come out? The banking sector or the financial sector was just starting to outperform
And then, you had this extra regulation come in, which has dampened the sentiment and of course now we wait for, you know, who's next or who could be next. And that uncertainty doesn't help. Markets don't like uncertainty. Therefore, that's why you've probably seen the volatility not just within the sector, but within the market increase as well.
So I think that's one of the factors which is keeping our markets down, rather than witnessing a bigger rally in the banking sector than we've seen so far.
What are the sectors that you see as possibilities of growth over the next few months? Would you be waiting till after the elections to really make some of those investments? What are the spaces that you find interesting?
Andrew Holland: I don't think you have to wait for the elections because there's certain sectors that will witness government spending.
Defence is one, railways is the other, infrastructure is another. So those three kind of segments, you are just going to see a lot of growth going forward. So when we have the elections, whatever the results are, those three are going to see continued spending, as would globally anyway. And renewable energy is one of them as well.
I think in terms of themes, there are two themes that I think are still very nascent—premiumisation of beverages, both alcoholic and non-alcoholic. I think that's going to continue, as people have a spending power per capita GDP at $2,500. It's just going to continue rising. So it is at the very start of the runway there.
And I think, the same about the electronics manufacturing sector. I think, it's early days. A lot of new players are coming into this sector. And I think, there's enough size there both domestically and for exports going forward that you'll see some of the big leaders come through over the next 3–5 years.
In defence and railways, the only question mark is over the runup already. In some of these like Titagarh Railways, or Paras Defence, the entire lot has already run up. Do you look at the state-run companies as the first choice?
Andrew Holland: A lot of them are state-owned companies. You don't have the choice anyway. The way I think about it is, I fast forward three years, and say what you know, what would be the profitability of this company, in my view, in three years’ time, and what's the P/E then.
If you look back, you're probably buying something which you think is expensive now, but actually was cheap because of the growth that you're seeing in both earnings and revenues over the next few years. So fast forward, look at the valuations, work it back and say this is still looking cheap.
So, that kind of growth in the industry you can't capture in the kind of just the forecasts over next quarter or the next two quarters. You got to have a look at a longer term view of where you think that company is going to be.
Andrew, when looking at some of the real estate companies do you see the pre-sales or the future potential already priced in, or do you see a further upside there?
Andrew Holland: There are different real estate companies in different parts of the country as well. So you have to look at them equally in a different light.
I've never looked at pre-sales, to be honest, because it lends itself to something like, let's say, you're building something and then you know a lot of investors come in. They buy at whatever price they buy at, only to sell later on to make a profit.
So someone's making more profits than the real estate company. That's for sure. But once that market dries up for whatever reason, then obviously you know that those kind of pre-sales could become sales. So therefore your ratings would fall. So I would never look at it.
I would look at only two things—cost of land bank, and how quickly can they deliver those buildings, apartments, or commercial real estate. That's what I'd look at. I obviously look at real estate companies, which have got that commercial rental base as well, because that will help them through any difficult time that they have.
I think one sector that has kind of been ignored for a little while now is affordable housing and I still think that's going to continue to grow. Maybe not at the kind of heavy rates that we're seeing in some of the premium markets of real estate. That's what's captured the headlines.
But don't forget when you do affordable houses, these people move up in terms of aspirations going forward, and that's the key. If you don't have that, then you know that the market doesn't move from the low end all the way to the top end.
