Fed's Dovish Tone Will Be In Focus In September, Says Andrew Holland

Andrew Holland: I mean, that's what I would usually be thinking and thank you for the opportunity. But it really depends on what Chairman Powell of the Federal Reserve says. You know, quickly, if it's 25, I think the market's already expecting that, but it's really what the words are about going forward, because the market's baking 100 basis points for the year by the end of December, so that's quite a large move from here.

So, if it does 50, I think the market has further legs to go. If it does 25, then it really depends on the words that he uses to say how quickly he might move for the rest of the year, and I think that would be the key. So, if he remains dovish, that you know, we're on this path downwards in interest rates, I think the market would like that.

I think the fear for the market has always been that, you know, the Federal Reserve did get the kind of move on the upside delayed. They thought inflation was transitory. So, I think the market's expecting now then, to be ahead of the curve. I think anything that's not seen to be like that, which would cost him more jitters in the market. But before that, I mean, before the 18th, we have some Jobs reports next week, and I think that will give us a flavour of how much that rate decrease might be. Is it 25 or 50?

Andrew Holland: Yes, we've become like a low beta market, really, with all the cash that's coming into the markets, and sitting in the sidelines, in some of the mutual funds, where I think cash levels are reasonably high. So, we're all kind of sitting there, kind of thinking, you know, valuations are high, we need to see a correction. But you're right. I mean, with this weight of money, it's not happening.

So, unless we have a sustained fall where people feel some pain, you know, it's really not going to kind of stop these flows for the time being. So, but you know, you're really kind of looking around to find where there's value, and it's very difficult to find at the moment. So that's why the market, yes, it's creeping up and it's hitting new highs.

But I think most of the gains for the year, and we're looking at, say, 15% earnings growth, and we think the market should rise in line with that. You're already kind of clocked in around 12 since April the 1st. So I don't think there's that much more to go in the very short term. I still think the risk is to the downside, but it doesn't necessarily mean it has to be a big downside. So, if markets globally correct 5-10%, we'd probably correct half of that.

Andrew Holland: So, it's, you know, kind of ongoing, kind of an equation in terms of finding the value, I'm just not finding it. So, what I'm doing is continuing to look at what we talked about before. So, you know the themes that I think will play out over the longer term, where I've had, I'm happy, to pay higher valuations on the broad theme. So, we talked about these before, but defence spending, renewable spending, and obviously the themes that I think will continue to play will be hospitality.

I think people continue to travel and enjoy experiences. So, hotels fall into that, premiumisation in the beverage sector both alcoholic and non-alcoholic beverages, and the electronic manufacturing sector, which, again, is a long, long way, we are just at the start of it. So these are the kind of companies and sectors which I think, you know, are long-term themes that are not going to go away from us.

But the catalyst, I think, for the market to move higher is when the bank sector is going to move higher. I think, you know, it's been something that we've been talking about, we get excited about, but it's not really happening. I think it can only happen once interest rates start to fall in India, and you get those, obviously, those gains from the bond holdings, which will help the banks, and obviously that would trigger, we hope, the private capex cycle more and therefore, ending, to these corporates.

So, corporate borrowings and lending will start to increase for the banks and get us a lot higher ratios going forward. So that's where the problem is. It's the banks, but it's not participating, really. So maybe with interest rate cuts, that's the catalyst.

Andrew Holland: So, if you're working on the basis sense, I think you're taking that October rate decreased by the RBI is out, so it's going to be more like December. The banks will have a run into that. So, you know, I think picking them up now, because valuations are quite reasonable compared to a part of the market, you might just have to hold a little bit longer, take a bit of pain in terms of underperformance.

But once that starts, you know, there's a lot of underweight foreign investors in the banking sector, and I think also for local investors that have to kind of start to increase the weightage again towards the private banks in particular.

Andrew Holland: Yes. I mean, it's had a great run, and I think we're in that pause phase at the moment. I'm meeting a few companies today, so I'll have a better view on where I'm thinking about the real-estate market. But it's been, obviously, we've seen it as an asset class.

People buy more and more, and I think where I'd like to kind of spend more time is looking at affordable housing again, because I still think that's, you know, if we get that moving, then that pushes up everyone into the higher levels of purchases for apartments and so forth. So, I think affordable housing is where I probably look a little bit harder, in terms of finding the right companies, whether it's the financing or it's the building of affordable housing.

Andrew Holland: You know, every time I speak to people you know, you meet around and say, you know, what's your ratio of debt to equity and it's nearly 90% equity, and it's hard to say, you know, you should need some money for a rainy day because they're making good money, and they've seen, you know, market falls and so forth.

But I think it depends on your risk appetite, but I would always have, you know, more than 10% in, I'm not saying cash, but in some kind of debt instrument for the rainy day in case markets fall and it gives you that opportunity to buy some of the companies at more reasonable prices.

Andrew Holland: If you take the Nifty, let's just talk about that. I mean the big weightage there is, obviously, financials, which is 30%. So, it goes back to what they're saying, unless financials really start to perform, and we've been saying it for some time. Now that we're on the verge of it happening, but NIMS remains under pressure.

The banking sector, in terms of getting deposits, remains under pressure. So until something eases in that, then you know, it's going to be hard to, kind of, say, go full into the kind of large cap, because it's not being supported by the banking sector. Once you feel that that's ready, then that's the time to move. But you know, if you look beyond the Nifty, then you have to go back to the themes I mentioned, you know, to really get more alpha from just owning the index. 

Andrew Holland: I think aviation, hotels is the way to play. Obviously, the kind of experiences hospitality sector, you know, I think we're, I read somewhere, I think we're the third largest kind of travel in terms of airlines and in terms of people with passengers in the world now. So that's only going to increase, because we have a young population, and the young population want to travel, want to experience something.

So, you know, really is at the cusp of something changing here, where you know, particularly when you get to over $2,500 per capita GDP, people will spend more. It goes away from your refrigerators, your TVs and so forth, more towards experiences. So, we're at the very, very start of this.

I think there are problems within the airline industry. I think those will be, I don't know what about SpiceJet, but obviously any problems there are the leaders then, which is kind of probably Air India and Indigo and a CASA, to some extent, are going to be the beneficiaries of that, and they seem to be doing well. So I'm not sure what the problems of SpiceJet are, but I think it doesn't take away from the fact that we all want to travel.

Andrew Holland: I think both are doing exceptionally well. I think, you know, I'm maybe more old fashioned, so if I want to go buy a suit, I'll go to the shop and buy it. But, you know, I think, I think the younger generation are more happy, you know, buying online. But again, I think that experience of going somewhere, you know, trying things on, I think, is not going to go away from us.

I think that will continue. So, I think both sides and as you quite rightly mentioned, you know, Trent's doing fantastically well. But I think e-commerce is slowly but surely going to eat into that market share. So I think a combination of the two is where I'd be at the moment. I don't think I'd say it's going to be only e-commerce versus traditional companies like Trent.

Andrew Holland: I'd rather kind of go to themes where I know that there's going to be money spent. So, you know, if I think of railways, you know, I can think of, even the rail tracks to the wagons and so forth and so on. So that's where I probably put my bets on those companies, in terms of the railways. In terms of defence and renewables, we know that the country is going to be spending money on this, everyone in the world is going to be spending more money on defence.

So it's a theme that's not going to go away. I think part of the problem is that when you're forecasting for these defence companies, because, you know, it's obviously shrouded in confidentiality, there's no visibility on the order book. So when orders come, they come in very bulky, and that's what pushes the share price.

So I think once the ordering starts again, I think we'll see there's a fillip to all of these companies where it's in, you know, the defence side or the renewable side. So I'm expecting that to happen from September onwards, you're going to start seeing a slew of contracts being given by the government across these sectors and that's the next leg of the move up to these companies.

Andrew Holland: So two things, one is, let's talk about the earnings. I mean, it's been quite disappointing, as you said. You know, I've seen more downgrades than have upgrades across different sectors, and what analysts are doing is quietly reducing target prices as well, rather than maybe sometimes taking the red pen to earnings. But they're expecting, probably, that earnings will slow.

What's going to drive earnings going forward is obviously the fact that interest rates will fall in India, as well as globally, going into the back end of the year. If the capex cycle that the government, I just mentioned that the government will kick start, in terms of orders flows through to the private sector, which I believe it will, then that's the extra kind of fillip for the market in terms of earnings, because, you know, as and when money get spent, you get a lot more kind of orders going across different sectors. For example, if you're doing roads, you're going to have more cement and so forth and so on. So that will I think be the earnings driver and the multiplier effect of the government capex along with private capex in the second half of the year. But it’s going to be more I would say, you know, January to March would probably be going to see the earnings start to pick up again, more fully into FY 25-26.

Andrew Holland: I think, you know, maybe 2-3% higher in December.

Andrew Holland: That's a great question. I would probably go for mid-caps.

Andrew Holland: I think it'll be, you know, given our valuations, I think it's going to be more the domestic investors, rather foreign investors.

Andrew Holland: Premiumisation.

Andrew Holland: I have, you know, holdings in both. I don't think you can't just miss out on airlines and say buy airlines but not have hotels, someone's going to stay somewhere.

Andrew Holland: I am not so up on medical tourism. So, I don't know which players for that, to be honest.

Andrew Holland: It depends on your risk appetite, but anywhere, I will think, 10-15%.