Andrew Holland leads the investment advisory business as CEO of Ambit Investment Advisors, a JV between Ambit Holdings and Nikko Asset Management. Rated a top ranked analyst by independent surveys in the UK, South Korea, Japan and India, Holland was MD (Strategic Investment Group) for Merrill Lynch in India before joining Ambit. Earlier, he has had stints with Barclays and Credit Suisse also. In a freewheeling interview with Sunil Kumar Singh, Holland says there could be a new bull market after the general elections are over and that the GDP growth would start to grow from the current 4.5-4.6% this year to 5.5% a year.
2014 hasn’t been a good start for the MSCI Emerging Markets Index. In the month of January this year alone the index dived 7.5%. How do you assess the outlook of emerging markets for the year 2014 going forward?
I think it’s going to be quite tough and the reasons are obvious. Before the start of 2014, there was a widely-held belief that the US Fed would slowly taper off its quantitative easing programme. The US economy has been showing signs of improvement and there are indications that the world’s largest economy is poised to keep accelerating this year. This improvement in the US economy has prompted investors to talk not just about tapering but also about the rising interest rates in the US, which I don’t think emerging markets are ready for.
The rollback in the stimulus programme by the US Fed has pushed US interest rates higher, encouraging investors to withdraw from emerging markets to the US in search of higher returns causing market turmoil in January in some emerging markets such as Brazil, Argentina, Turkey and a few African countries.
India didn’t quite fit into this situation as being faced by other emerging market countries. This was primarily because of the steps taken by the country in narrowing its hefty current account deficit and shoring up its forex reserves. Having said that, India cannot remain unscathed from what’s happening in other emerging markets. The issues negatively impacting other emerging markets are also going to affect India. But overall, compared to other emerging markets India is better off.
Does it mean India is placed in a better position than other emerging markets due to its improved macros such as current account deficit and forex reserves?
Absolutely! The problems being faced by the country have been dealt with well by the RBI and the government in terms of cutting back spending. So both the current account and fiscal deficits look much better than last September.
The one factor, nevertheless, everyone is worried about is the slowdown in China and how that is going to affect the global economy, including the emerging markets. In the next six month, this issue could play out on a larger scale. In the coming months you could see a couple of global headwinds affecting emerging markets.
How well do you believe Indian markets are equipped to weather the roll-back of quantitative easing this year?
It’s better placed than most. But there is a fear about tight liquidity because of tapering by the US Fed. The scale of liquidity outflows could vary but one fact we need to acknowledge is that liquidity will remain tight and that is a major factor that is going to affect every market, without exception to India.
Last year, FIIs made net inflow of around $20 billion in equities in Indian markets. What’s your outlook on the FII inflows in 2014, and especially after the upcoming general elections?
I would say India is going to get something between $10-15 billion this year of net foreign investor inflows. It could be more than that but, at present this is a more reasonable way of thinking without knowing who’s going to be at the helm of affairs.
Do you believe FIIs are just waiting for elections to get over for a clear direction?
I think there are two things to consider here. One, generally, a lot of foreign investors would not strategise their next move now by thinking the XYZ party is going to win and that’s why the markets would go up. Instead, they would wait to see, one, who gets in and, two, what their policies would be, and then make their decisions thereafter.
What’ your outlook of the rupee? Last year it fell around 11% to a record low of 68.85 against the dollar. How do you see the rupee-dollar equation going forward this year?
Stocks markets have been under pressure in many emerging markets in recent weeks. If the flow of funds away from emerging market stocks and bonds continues at the same pace or gets even worse, we could see the rupee heading down towards 65 level against the dollar. However, if the rout in emerging markets is not that severe in the coming months, then I see the rupee trading around 61 to 62 levels this year.
Let’s move over to India’s banking sector that continues to remain weighed down by asset quality concerns and slow credit growth. Last year, Bank Nifty fell by 11%. What’s your take for the banking sector this year? Do you believe the sentiment will pick up?
A general view is that the sector could see a pick up after the elections. If the results are favourable to the sector it could trigger a positive sentiment because then everybody would think that the economy would revive quickly. However, we don’t believe it’s going to be as easy as that. You might see a bit of relief rally in the banking stocks after the elections, but we still believe it’s going to be a difficult time for the sector and banks could remain under a lot of pressure. The recent crisis faced by the United Bank of India summarises very well the problems in the sector.
What advice do you give to your clients – should they play short or long in the Indian market?
For the next few months we are not biased and we have our own long-short calls depending on the market dynamics. But one thing that is for sure is that the market is going to be volatile. We believe we could see a new bull market after the elections are over. Whichever way one gets in the market, whether from the high-end of the market or from the low-end, one thing is for sure that the GDP growth would start to grow from the current 4.5-4.6% this year to 5.5% a year after and then 7%. This is akin to the period between year 2003 to 2006 when the country’s GDP growth started to accelerate and the capex in infrastructure projects started to have multiplier effects on the economy. But that doesn’t mean that you’ll buy the whole market.
Which sectors do you believe are going to be relatively weathered against the headwinds?
We prefer four sectors, namely IT, industrial utilities, auto & auto components and metals, that we believe investors could look for.
What about the interim budget? Do you believe the Indian finance minister sounded highly optimistic on the fiscal deficit target of 4.1% for FY14-15?
Yes, I think it is a wishful thinking whichever way you look at it. We however expect India’s exports to grow a faster pace in FY15 as against FY14, primarily driven by a pick-up in growth in the US and India’s improved competitiveness in manufactured goods.
Give us a sense of the just concluded earnings season? Do you believe that the worst is behind us?
No, not at all. People choose to say that the big sectors i.e. IT, pharma and consumer goods did well in Q3. But the one vital point they miss out is the fact that the earnings of these sectors are not as good as analysts expected and their profitability and revenue numbers are lower than analyst expectations. If it continues into the next quarter as well there is a higher risk of a downward revision of estimates.
Could you name three most crucial reforms that Indian economy desperately needs to get onto the growth bandwagon again?
India allowed FDI in multi-brand retail in 2012 after prolonged delays and that too with many riders. Similarly, foreign investment in the insurance sector remains capped at 26% for a long time despite demands to increase the limit to 49%. What India needs at the moment is the assurance to investors and the corporate sector that reforms will go ahead at a steady pace and the confidence build-up measures will continue.
Which is going to be favourable for foreign investors after the elections — a government by the BJP-led NDA or the Congress-led UPA?
There is no point in analysing who is going to be better, because until the government at the centre comes up with what its policies are it is very difficult to judge any of them.