Why Andrew Holland Is Not Going All-In On India Stocks
The problem for India is that valuations are not as attractive as China's, says Holland.
Andrew Holland is in no rush to pile more money into India stocks as he doesn't want to go after "leftovers" after missing the recent rally.
"The problem for India is that valuations, whilst they're not killing, but they're not so attractive if you compare it to China," Holland, chief executive officer of Avendus Capital Public Markets Alternate Strategies LLP, told NDTV Profit.
"It has been a great rally, don't get me wrong. And I think everyone's scratching their head a little bit, how they missed it," he said. Holland does not want to push into this market "aggressively" when a lot of the gains have already been made in individual stocks rather than just the indices.
According to Holland, investments will start pouring into emerging markets when there is stabilisation in China's property and stock markets, as some of that money might also flow into India.
In India, growth of around 15% in earnings and a gain in the market is anticipated for FY25, he said. However, this projection could be altered, potentially increased to about 20% by two factors, according to him.
"One, the realisation that China has bottomed out and you're getting flows into emerging markets, which India will get some of that. And two, that earnings growth starts to accelerate towards the back end of 2024 into 2025, and that 15% earnings growth becomes nearer to 20%," he said.
The other factor which could help is if the RBI starts reducing interest rates, which will be helpful for the banking industry, as it is struggling in terms of NIMs, Holland said. Given banks are a large weightage in the index, it could be the rally point for the market, the CEO said.
View On China
China's central bank has cut the benchmark lending rate and kept the one-year loan prime rate unchanged at 3.45%, as compared with the Bloomberg estimate of 3.40%. The five-year loan prime rate has reduced to 3.95%, as against a Bloomberg estimate of 4.10%.
According to Holland, the Chinese central bank should do everything it can to make investors feel better about the property market, as its current troubles are hurting the economy and confidence. "If the central bank takes strong actions to support the property and stock markets, it could make these markets more attractive and affordable for investors," he said.
Currently, people are hesitant about investing in China. While many see it as affordable, there's a need for a positive catalyst, especially in the property market. "This is the start of what the central bank is doing there. So, that's the good news," Holland said.
U.S. Fed And Expectations
People used to think that the Federal Reserve was in charge, deciding when to lower interest rates, but now it seems like the market is actually telling the Federal Reserve what to do, Holland said.
The recession or hard landing which the market was possibly anticipating is not going to come, he said. Inflation will be lower, but earnings are expected to grow. This narrative will be played out not just in the U.S., but across global markets, according to him.
Watch The Full Interview Here:
We are seeing range-bound trade, volatile trade, but the large direction is definitely trending upwards. Let's begin with the importance of global queues at this point. Do you think that this is still a market, which in the medium term will be directed by what the Fed does and what the U.S. market does?
Andrew Holland: I think we have been thinking that the Fed is leading the way but you know, despite the fact that now we could be waiting longer for interest rates to fall, the market is just looking through it. So I'm not sure the Fed is giving direction to the markets. The markets are giving directions to the Fed and saying this is okay, don't reduce rates so quickly, because earnings growth will be good.
The recession or hard landing, which the market was possibly anticipating, isn't going to come. So that the Goldilocks scenario of lower inflation or trending lower inflation, rates yet will be lower, but earnings growth will be there—is a narrative which has been played out not just, you know, in the U.S., but you know, across global markets.
I mean, it's interesting. You have the U.S. where you know, it's probably growing real GDP growth of say 1.5-1.7%. Not great, but okay. UK, Europe, particularly Germany in technical recessions, same with Japan, but our markets are kind of towards new highs. And then, there's that dichotomy in terms of central banks, you know, everyone has raised rates. Japan didn't raise rates, but the markets are getting towards three-decade highs, which hasn't been seen for so long. So I don't know which central banks are getting it right anymore. Is it the Fed, is it the Japanese, is it the UK or the European Union?
May I hazard a guess on if China's getting it right today? China has cut its five-year rate. Its benchmark lending rate to 3.95% is the first cut since June. Do you think China or the Chinese central bank, in that sense, is ahead of the curve?
Andrew Holland: No, I think the Chinese central bank has to do everything possible to get some comfort for investors behind the property market because obviously that's been having a devastating effect on the economy and confidence. So therefore, if they can shore up the property market, then they have a very cheap market. And of course, they are trying to do that with the equity markets too.
I would like them to do more of a big bazooka in terms of monetary policy to get that counter back. But at the moment, you know, no one wants to be in China. I don't think it is cheap. But they need this trigger on the property market and this is the start of what the central bank is doing there. So that's the good news. And that's good news for emerging markets, because, you know, all the outflows that we've been seeing have been related to China, which has obviously impacted India's flows as well. So if we see more confidence coming back to the Chinese market, then we'll get flows into emerging markets and India will pick up a large portion of that too.
Let me talk about flows in the Indian context. So December 2023 was an outlier. In a sense, that's generally when everyone's on a holiday and you don't really expect flows to come in. That's not what we quite saw. We saw aggressive flows coming in. Now just look at February. When you've seen outflows from FPIs of about Rs 14,000 odd crores, you're seeing markets touch new levels, but without the sort of tailwind of an FII or FPI inflow. Do you think that changes at some point, and that's when you see the next phase of bull run in the Indian markets?
Andrew Holland: It's a good question. I think that relates to what I've just said, that if you get flows into emerging markets— because China now seems to have kind of bottomed out in terms of the property market and the stock market—then you will get flows coming into emerging markets and some of that will come towards India as well.
The problem for India is that valuations, while they're not killing but they're not so attractive, if you compare it to China. So we will get some flows. So that would be the extra leg.
But, you know, the question now is, is the market pricing in, the kind of the fact that the elections seem to be in the bag, you know, for the ruling government and, you know, we'll probably see a run-up to that in March but then, thereafter, what after that? What's going to be the catalyst to get the market going? And I think, that's going to be the question we all have because the market is just pushing itself higher on the basis that you know, all the good news is going to come through and then it's really what next. And I think that's going to be the difficult time for the market.
Talking about the pre-election rally and what that picture looks like, ince the three state elections in November last year, that re-continuation or the continuation of policy and the same government coming back was priced in. What does it mean in terms of capex? What does it mean in terms of the PSU rally we've been seeing? What does it mean in terms of more opportunities for companies in renewable energy, in railways, in defence? Do you think a very clear, comfortable win at the end of the day, translates into all of these clear opportunities, where you can drill down to a sector that works and a stock that works?
Andrew Holland: Of the sectors you mentioned, we do know that the government will spend on infrastructure. We know it is going to spend on defence and renewables and that is a global factor, not just an India factor. So those are, you know, clearly industries which are going to continue to receive very strong orders going forward. Of course, execution is going to be key in that as well. But I think the market will price that in, as we come towards the end of the elections. And these stocks will continue to do well. I still think they have a long runway. So I'm less worried about the kind of valuations in these kinds of sectors at this time. I think what we have to look for is what could upset the applecart after the elections are over.
I was at the Kotak conference yesterday and Uday Kotak spoke there. So I will quote him, which is quite interesting. What he said was that, you know, in the kind of growth that India is expecting, it can't just be a one-legged race, in terms of just equity markets.
Therefore, the bond markets have to play a bigger role in the funding going forward and what he said was that the differential between bond taxation, which is around 40%, and some of the equity taxation, and he mentioned ELSS (equity-linked saving scheme) and arbitrage, is 10%. So that gap is too large. So may be, you know, that expectation of some kind of change in capital gains tax for equities could be something that we'll see after the elections and may be the markets might not like that.
That's one of those things that makes it from one budget list to the next one every year. Capital gains tax, inheritance tax will there be any leeway there? One would argue that this government doesn't really need to change anything. There is no compulsion to change anything or to hold back their hand if it comes to taxation.
What is your take on the pre-market rally? You said from March onwards, we may see a pre-election rally. From 2014, which was term one for this government, three months before the elections—a 15% jump. Before the 2019 elections, it was 8% jump. Are we going to see that pre-election rally muted, considering that the result is now priced in once again? What exactly are you rallying up for?
Andrew Holland: I think you are going to be rallying up on the terms of the policy continuation and the government spending will move very quickly after the elections. And obviously, you know, there could be bigger reforms going forward, which will excite the market. What are those reforms? We'll have to wait and see and taxation is one of those. I wouldn't rule it out this time, in terms of equity taxation at all. So I think those are the kind of reforms which, could happen and which will help fund this economy. You have to fund this economy at some point. It can't just be the government all the time. Private capex needs to come in. So if you had that kind of a rally, our forecast for FY25 is that, earnings growth should be up around 15% and we think the market gains will be similar, around 15%. So if you've had that 15% before May, there's nothing to go for in the second half of the year. That's for sure. So there could be some disappointment in terms of expectations thereafter.
The only thing that would change it, in terms of moving that 15% may be to 20% are two things. One, you know, the realisation that China has bottomed out, and you're getting flows into emerging markets, of which India will get some. Two, that earnings growth starts to accelerate towards the backend of 2024-25 and that 15% earnings growth becomes nearly 20%. So those are the two factors which would propel the market higher in my view. The other factor which could help is, obviously if the RBI starts reducing interest rates, which will obviously be very helpful to the banking industry, which is struggling anyway in terms of NIMs (net interest margins), and that being a large weightage in the index could be a rallying point for the markets.
So that's, I suppose, in terms of immediacy. An RBI rate cut could come earlier or could be the next big sort of movement for the markets in terms of what happens with the financials. Talking about corporate results, were you happy with Q3, in terms of the performance of these companies? A lot of sectors, a lot of stocks have run up on expectations, especially in the PSU space. And the Q3 numbers were an opportunity to examine whether the business prospect is that solid. What was your sense on that end?
Andrew Holland: Apart from certain companies, I don't think there were any real big surprises. The only thing that I'm seeing now is that it is not that earnings are being upgraded so much. Its target prices have been reached and therefore, target prices are being raised, but not on the basis of earnings growth or earnings upgrades.
So that's a little bit worrying because I think, you know, the street is trying to say, you know, we can push the PEs to a higher level because, you know, something will come through in the next one year to increase earnings, but it's not happening. So I'm a little bit sceptical in terms of the share price targets rather than the earnings growth of a lot of companies.
So what I would say is that, while earnings growth is going to be important, if you take the banking sector, it wasn't a great quarter. So, you know, there's still a lot of headwinds for the banking sector in the very short term. So, increasing price targets doesn't really work for me. I think it was interesting.
I mean, not as though I'm commenting on the stock itself, but you know, Coal India, I think came out with a forecast saying that, you know, prices are starting to kind of fall. But of course, most of the street so that's okay, because volume will pick up, I don't get it. So these are the kind of things that happen in a euphoric market where share price targets become too high.
I'm going to come back to you on that and drill down a little on that Andrew, because it's truly astonishing. You're talking about Coal India. Let's talk about a One 97 (PayTM). Pretty much their business model has been cut off. The blood supply has been cut off, but you have house views that you know, let us up the target tribes and then a lot of disparate views coming in. Do you think that's a symptom of a bull market where you're looking for an opportunity or you're looking for hope against hope for the target price to go up?
Andrew Holland: Well I mean, I've seen reports with share prices half of where they are today and share prices are 50% higher than where it is today. Someone's going to be right somewhere. I think on these kinds of regulatory kind of decisions from the RBI, it's always better to wait till the dust settles in terms of what the real business model will be going forward because I think we're all grappling in the dark a little bit, in terms of what the outcomes will be, and how RBI will react going forward.
So I think there's still a distance to go before we have full evidence of what's going to happen here. But I think, you know, in terms of rather than individual stocks, to talk about PSUs, I've seen a lot of the research reports saying, you know, this is the time and it's all changed and there's better governance and so forth and so on. I think for certain companies, that's the case, but I don't think it's for all. So I think we're taking again, a view-point that just because the stock rallies or a certain section of the market rallies, that everything is the same for everybody and it's just not the case.
So recent reports may be, should be taken with a pinch of salt. Would it be fair to sum up, Andrew?
Andrew Holland: Well being an ex-research analyst, of course, I didn’t say that. I was just saying this is how the market narrative changes. It has been a great rally, don't get me wrong. And I think everyone's scratching their head a little bit, how they missed it.
But you know, it goes back to you know, when the markets where they are at the moment, and I'm not saying there won't be a pre-election rally, but you know, when you arrive late to the party, but all the good stuff has already been eaten or drank and you are left with, I am not saying the scraps but, some of the leftovers, that's where I'm feeling at the moment. I just don't want to kind of push into this market so aggressively, you know, when a lot of the gains have already been made in individual stocks rather than just the indices.
