Will Sit On Cash Rather Than Buying The Dip: Avendus Capital's Andrew Holland

Andrew Holland: That's correct and I'm not saying that won't work at some point, but I think as you used the words brave, I think it would be brave at the moment and whilst I'm saying it's not that easy to say, is it similar to problems before because I think this time around with one big difference to my mind, is the economic war, which we are waging with Russia and I don't think you've really seen sanctions but you haven't really seen an economic war where you have gone after their foreign reserves and companies are moving out wholesale now and stop doing trade. So that's the big difference and of course, you know, Russia and Ukraine between them have quite large exports of wheat and corn so the other area is food. We all look at oil, but food prices are also rising very quickly.

So, I think at the moment, I think everyone was not hoping, that's the wrong word, but everyone was expecting maybe that Kyiv would have been invaded and taken over by the Russians by now, but it seems to be more prolonged. Now, if you get something that's more prolonged, the risk is that, you know, each size of obscene rhetoric or obscenity, to try and cause a little bit more pain and that's what we're seeing now at the moment and that's what we need to look at.

Andrew Holland: I will come back to India in the end, but what it means for Europe in particular, is that you know, at best Europe will have stagflation, but it's looking more and more likely that it's going to fall into recession. With oil prices where they are, I think stagflation is something that you could really talk about now in the U.S. Now, markets don’t like any of those two scenarios - stagflation or recession. So that's what they've got to grapple with, how long will the conflict continue and how much damage will it have, to the global economy.

Now for India, obviously, the fiscal deficit, interest rates will have to rise in India, that's for sure. Otherwise, the currency will head towards at 80 very quickly and that in itself brings in inflation because you're depreciating currency itself. So why have foreigners continued to sell? Because anyway, from October onwards, they were expecting interest rate hikes in the U.S. When that happened, we spoke about this before, they tend to sell emerging market assets, whether it's currencies or markets and so forth.

Now with this high inflation and growth concerns and obviously, everyone's just taking risk off the table, safe haven is obviously the dollar $ and the Swiss Franc at the moment and that's about it because everywhere else in the world is going to be hurt by higher oil prices. Even though prices in the U.S. are rising, they do have a large supply, so they can look after themselves to some extent.

Andrew Holland: Let me take the two, so let's say it continues a little bit longer than we expected. Then what will happen at some point is increase in commodity prices and food prices, it will have a demand destruction element to it as well because obviously, you know, if you're studying, say in the UK, and you've got 100 pounds as your disposable income, half of that might be going down to new energy bills or food prices. So, you'll have less disposable income, therefore demand genuinely for products and services will start to fall. So, it will bring commodity prices down at some point and that's probably why recession is first and then commodity prices fall.

So, I'm a little less worried about that, in the longer term, but I think if things were to normalise and I said normalise, if ceasefire takes place, then there's two things that will happen. One, commodity price will fall, obviously and then if it's a ceasefire where either trade starts to happen, sanctions move away, then obviously, we will start to see that supply chain start to improve again, and therefore again, prices will fall. But the fact is that you still have to tackle inflation, it's not going away.

So you'll go to the next phase, which is the interest rate environment globally and the Fed have already said 25 basis points. I suspect if you had a ceasefire tomorrow, they would do 50, just to get things under control and get things moving. So, but I think the market will rejoice that in some respects and on a more optimistic view, if you're in a hurry, true. Then there's a few things that I think should be two or three big trends which will happen. Governments will do what, they'll look at their fund reserves and say, you know, we don't want to fall into this trap in any future date. So, should we be having dollar-based assets, like the U.S. $, so will be into a lower depreciating dollar over time, I am not saying everyone's going to sell their U.S. $ tomorrow, second, companies and governments and companies are going to say, what is our supply and kind of what's the problems with any supply going forward.

So, if you think about it, you'd naturally say should I be buying semiconductors from Taiwan and given this the risk of China's intentions so you're going to start to look say, we need to have more of this in our own country. Right. You see with Germany defence spending starting, renewables are going to be the next big area because of the oil price and gas prices. Therefore, everyone is going to look at where we have a gap in our supplies, so that we can start filling up at home. So, the capital expenditure for each of the countries towards these areas could be very significant and that will lead to GDP growth going forward.

Andrew Holland: It could be, but it's not going to happen, no one is going to start spending straightaway, so commodity prices first would fall under your scenario. ceasefire, get back to normal supplies, no sanctions, and then you'll start to see companies and particularly the governments saying like we are doing, you know, semiconductors in India, we don't have we need to invest more, we need to give incentives to do more in these areas. So that would lead to the, I believe, company Capex cycle, to fill in those gaps going forward.

Andrew Holland: You are right. It's very tempting to dip your toes. But we're going to sit on cash, we'll be happy doing this, for some time now. I know the scenarios we talked about from worst case to the best case, you know, it's too fast changing for my liking. So, you can be whipsawed both sides. So, sitting on the side, letting things come to some conclusion somewhere gives you that kind of confidence to say, okay, I think I know why I'm going into the market and it's the companies I like, so I got my shopping list ready, but the question is this that if I do it too early, I just get whipsawed.

So, I can sit, if I miss the first 5% of the share price rise, It's okay, I am in the longer term rise, going forward and I think that's what I will do but what I was trying to emphasise to you, maybe, if the optimistic scenario plays out, it'll be different sectors of the economy, which do well and will lead the market higher, not that if its ceasefire tomorrow, Nifty goes up, everything goes up with it, I'll go for financials, but I think once the dust settles again, nothing would say okay, if I was in Europe, I'd be buying defence companies, not just because it's a safety, it's a safety in terms of earnings and so forth. But I'm going to there's going to be huge growth. Now that might play against ESG type investing, but I suspect that will change. I suspect a lot of things will change.

Andrew Holland: I definitely think vehicles could have moved towards renewables, I think it will accelerate not just in India, but globally. Obviously, defence spending and whether India can play some part in that for companies, so for government is going forward as well, but I think that the big move will be in electric vehicles, it will be in digitisation, all of these will continue to rise, but there will be certain industries that India, as a government will look at and say, we don't have, we're reliant on everyone else in the world. But forget oil for a second but semiconductors are doing something, where are the areas of India will really need to fill those gaps and, you know, can it be done? Should our reserves be helping towards from that side of the, you know, the growth of India, rather than just having reserves because it reserves the reserves, that if you get sanctioned, it doesn't really matter.

Andrew Holland: Auto sector is facing multiple headwinds, two of which you mentioned and off course, if we're spending more of our money towards our energy and food bills, and you know, buying a new car is probably not the thing that we're likely to do in the very short term. But you know that deferral of purchase will probably make us look more and more towards electric vehicles going forward. So that's the positive side of it, but in the very short term, if you are walking up and down an escalator there's too many headwinds, at the moment for the Auto sector to overcome now, it will be oversold to some extent, and you will get that kind of move back up, if things stabilise, but otherwise it's a sector which for the time being, you should avoid.

Andrew Holland: It is more of how you view the conflict, to be honest. If you expect it to be more prolonged, more difficult and more sanctions coming then obviously these two sectors which you've talked about, continue to enjoy kind of that, that money move towards it because that's where you can oversee earnings growth and everything else, compared to the rest of the market. My view is this is that if you remember in 2007, oil price went to 140, I remember and then, you know we had financial problems in 2008.

At some point demand destruction will come in because of higher oil and commodity prices. So, if anything I am looking at when these sectors should be sold, rather than thinking. I mean, it's more trading to my mind because you're trading on a conflict. You're not trading on the fundamentals of the company and once that turns, these prices will fall very, very quickly.