Hunt For The Value Amid Volatility
Market recoups Monday losses, catch #AvendusCapital’s Andrew Holland in conversation with Niraj Shah. #BQLive
Transcript
00:00 - Thanks so much for tuning into this conversation.
00:02 Our guest is Andrew Holland, needs no introduction
00:05 and it's an important time to get him and his perspective
00:08 considering that we are in the midst
00:10 of some bit of volatility.
00:11 Monday certainly was, it's a bit of a recruitment
00:13 of some of those losses today for the world at large too.
00:16 Andrew, thanks for taking the time out.
00:18 Did Monday worry you, Andrew?
00:21 Because the combination, the chatter was
00:23 it's a combination of higher yields, geopolitics,
00:27 maybe higher crude prices as well
00:29 and not such a great earning season.
00:31 - Yeah, and we've seen some of those reverse a little bit,
00:36 haven't we, Neeraj?
00:37 I mean, oil prices have come up from those kind of moves,
00:41 partly because of, I think there's a lot of diplomacy
00:44 in the background trying to get hostages out of Gaza
00:47 and that's sort of the case.
00:50 But obviously, Israel at some point will have to do
00:54 whatever action they feel they need.
00:55 So I don't think we're away from that kind of volatility
00:59 for the oil prices.
01:00 And of course, bond yields in the US went from 5% just under
01:04 because of a couple of big names saying,
01:05 I think Bill Ackman, that huge hedge fund manager,
01:08 saying I've cut my shorts.
01:10 But what he added of why he cut his shorts
01:13 is that he expects the economy to go towards recession
01:16 at the back end of the year and that's the key.
01:20 Now, if that is the case, then obviously,
01:23 the markets are still not factoring that in.
01:26 So I think this volatility is gonna last
01:28 just a little bit longer yet.
01:30 So I think my feeling is that while some markets have been,
01:35 some people have said, it's gonna be a low beta market,
01:37 we don't fall so much when other markets fall
01:40 and vice versa.
01:42 We had come to that point where some of the sectors
01:46 or stocks have kind of run too high.
01:49 And of course, I'm not saying they're gonna big fall
01:52 in smaller mid caps, it's usually because of liquidity
01:55 as well, everyone wants to get out at the same time
01:58 and then of course, people just sit back
02:00 and wait for better prices.
02:01 So not concerned, obviously, any correction
02:06 is a good time to kind of be more constructive
02:10 and that's where we would be.
02:12 I think the only other thing that's kind of catching my eye
02:14 a little bit more is what's happening in China
02:17 with the stimulus packages and now the province
02:20 started to buy into equities.
02:22 It started to stabilize that market.
02:24 I still think they're using P shoes
02:26 is where they need to use the bazooka.
02:28 If and when they do that, then flows,
02:32 that were maybe looking towards going to India
02:34 might start going towards China because investors
02:37 might not like China at the moment, but things change.
02:40 And if there's opportunities to make good returns
02:43 on a cheap valuations, then that's where investors will go.
02:47 - For that to happen, do they need to move
02:49 from a water pistol to a bazooka?
02:51 Or could it happen with a series of moves
02:53 that China seems to be doing?
02:55 Some fixed deficit, high led spending,
02:59 some tinkering with maybe the reserve ratios
03:01 or thereabouts.
03:02 So they're doing a number of small steps.
03:04 Is that good enough?
03:05 Or would you believe for flows to meaningfully
03:07 move away from India and other EMs to China,
03:11 they need to do something larger?
03:12 - Yeah, they need to get that bazooka out
03:16 because all of these things will add up
03:19 to something positive, but you can't see
03:22 that it's gonna take time.
03:23 And I think if they can do something
03:24 which is more towards getting confidence back
03:28 in that property market, that's gonna be the catalyst.
03:31 And that's when everyone will say,
03:32 okay, yes, we're back into China
03:34 and we'll forget the stuff about the technology part
03:39 because that's gonna be ongoing.
03:41 But the government's taking action to not just shore
03:45 up the markets, but also shore up the property market
03:47 and get confidence back to the China,
03:51 not just the investor, but to the consumer as well.
03:55 - Got it.
03:56 Andrew, let's wait for that to happen if that happens,
03:59 but independent of that,
04:01 so the particular characteristic of Monday's fall
04:06 in particular for India, I thought,
04:08 was, I mean, it was accompanied by very low volumes
04:11 and net FI buying.
04:13 So the larger problem was at the broader end of the spectrum.
04:17 Could the HNI stroke retail investor
04:21 panic a little bit if indeed this rhetoric
04:24 around the war and higher crude prices, et cetera stays?
04:27 And therefore, could it happen that the nifty
04:29 or the benchmarks might be stable
04:31 with 100, 200 points plus minus here and there,
04:34 but the mid caps and the small caps,
04:35 which are up northwards of 20% YTD,
04:38 CST per move downwards, could that happen?
04:41 - Yeah, it could well do that.
04:43 That's just a good point you've made.
04:45 And what tends to happen is that all stocks
04:49 or all kind of themes, let's just say,
04:51 it's a mid cap or small cap,
04:52 everyone gets targeted the same brush.
04:55 So, you know, if you've got profits somewhere,
04:57 you think, oh, it's a big fall in the small cap index.
05:00 So therefore, you know, I've got small caps,
05:02 let me try and get out.
05:04 And that's what leads to that cascading fall
05:08 and then concern over it's gonna get worse.
05:11 As on the way up, you know,
05:12 that few things missing out was there as well.
05:16 It's a great time actually to do your stock picking,
05:19 to get to, you know, to look at the themes
05:21 that you've been playing.
05:22 So for example, electronic manufacturing sets,
05:25 you know, I've been talking about this for a long time.
05:27 If those stocks were to come down, you know,
05:29 because it's a broad kind of fall,
05:33 these are the kind of companies where you just
05:35 at the beginning of the runway,
05:36 and therefore, you know, you're gonna see, you know,
05:38 some significant gains over many years.
05:41 So that's the kind of thing I'd be looking at
05:44 rather than saying, you know,
05:45 that I'd be in that panic mode.
05:48 But you know, that tends to happen when, you know,
05:50 you can hit a peak, it starts to fall,
05:52 you start to worry about, I'm gonna be the last one in,
05:55 and I'm gonna lose money.
05:56 So therefore, let me just take money out.
05:58 But that said, you know, you still have that $2 billion
06:01 or 16,000 crores of SIPs coming in, you know,
06:06 which will, I'm sure will be at once,
06:09 you know, whatever promissivity we go through,
06:11 we'll start to nibble away at the livestock again.
06:15 - Okay.
06:16 Andrew, speaking to two or three global commentators,
06:21 read a couple of opinion pieces of people
06:23 who look at EMs at large from their vantage point.
06:26 All of them believe that EMs as a bucket
06:28 might actually be hired from here on
06:31 till the end of the year, because of seasonality,
06:33 because of maybe peaking of rates
06:35 and maybe cooling off of yields,
06:37 maybe DXY coming off as well.
06:39 I heard you talk about a couple of those things as well,
06:41 but I just wonder whether you believe
06:44 due to all of these factors plus seasonality,
06:46 that could the momentum be largely in favor of equities
06:49 for the rest of the year,
06:50 or is it difficult to predict that?
06:52 - Yeah, I think it's, you know,
06:56 you have to get to a point where you get the positives.
06:58 And so therefore, what are the negatives?
07:01 Well, we spoke about them at the very beginning,
07:04 but without reiterating them,
07:05 I think the one point that I'm still of the view
07:07 is that, you know, the US and the global
07:11 is gonna go towards recession.
07:12 I'm not in this Goldilocks scenario of soft landing.
07:15 I don't remember any soft landing in my time.
07:19 So, you know, I'm just not going for that.
07:21 So what you have is that wall of worry,
07:23 and then, you know, earnings get hit,
07:25 you know, and then the markets fall.
07:27 And then you get to the point where,
07:28 yes, demand is falling, inflation's falling,
07:31 so therefore interest rates will fall,
07:33 and that's when emerging markets come in.
07:35 Now, is that towards the back end of the year
07:37 or the first quarter?
07:38 Not so sure.
07:39 I think it should be towards the back end of the year
07:41 that that narrative starts to play a lot harder.
07:44 But, you know, there's only a couple of months to go,
07:46 so let's see if that plays out.
07:49 But certainly going into the year,
07:51 that could be the narrative.
07:52 Now, for India, you know, we have two things on our minds.
07:56 One is obviously the local elections, which are coming up.
07:59 I'm not saying that that's, you know,
08:01 kind of what's gonna happen in the main election,
08:05 but that will, you know, have investors
08:07 just watching a little bit closely
08:09 what the outcomes might be going forward.
08:12 And then, of course, you know,
08:14 we'll have the whole of the, you know,
08:17 the thinking around May of next year
08:19 and what's gonna happen.
08:20 So, you know, we got our own internal
08:22 kind of things to think about.
08:24 But overall, I still think emerging markets,
08:27 and Asia in particular, can reduce rates a lot quicker,
08:30 a lot faster, because we've dealt with inflation
08:33 for a lot longer.
08:34 It's a different type of inflation than you have in the US.
08:37 Once that interest rates start to kind of indicate
08:40 that they're going down, then I think the RBI
08:42 can act a lot quicker going into 2024.
08:47 So more positive in that respect.
08:51 But of course, there's a lot of things that can happen
08:54 in the Middle East, which could send,
08:56 you know, I've seen forecasts,
08:57 and as you were saying, that the oil is going to 120.
09:01 Now, if it goes to 120, it'll have a shock and awe effect,
09:06 but also will probably participate
09:08 in bringing the economy down
09:11 to get faster interest rates falling.
09:12 So, pain trade first, I think.
09:15 - Okay.
09:17 Well, then that probably seems to be the problem,
09:20 that the number of moving parts are always high,
09:22 just that this time around,
09:23 it seems to be a bit more higher than usual,
09:26 but maybe that's how it feels every time.
09:28 Andrew, I heard you talk about looking out for pockets
09:32 so that if there is a correction,
09:35 one can take advantage.
09:36 You cited EMS as one of those.
09:40 Do the nature of the other winners at large stay the same,
09:44 or has it changed because of maybe stocks
09:48 would have rallied or time would have gone by
09:50 or earnings have changed a little bit?
09:52 So aside of EMS, the other set of winners,
09:55 do the sectors remain the same?
09:56 Do the themes remain the same?
09:58 - I think yes, they do, actually.
10:00 I mean, there's, you know, I mean, you know, defense,
10:04 I mean, you know, given what's happening,
10:05 defense is definitely gonna be there.
10:07 Renewables is gonna be there.
10:09 CapEx, you know, the multiplier effects
10:11 of what the government and private CapEx is coming,
10:14 but again, with that edge towards those companies
10:17 which are more geared to kind of smart cities,
10:19 smart factories, smart something,
10:21 in terms of the CapEx cycle,
10:23 I think that's where you're gonna get better margins.
10:26 And then, you know, in terms of, you know, spending,
10:30 I just saw some figures, actually,
10:33 and I saw a little bit very briefly,
10:35 but overseas travel between the last quarter
10:38 before this kind of new tax,
10:42 you know, really, really skyrocketed.
10:44 So therefore, you know, people now feel
10:47 that they're gonna spend more money in India,
10:49 that's gonna be good for the hotels, airlines, et cetera.
10:52 So that theme doesn't go away from us.
10:55 And finally, is that, you know, beverages,
10:58 where, you know, alcoholic and non-alcoholic
11:01 are going through that premiumization.
11:03 I think we're just at the beginning of the runway there,
11:05 and I think that's gonna be a great earnings boost
11:09 for them over the next three to five years at the minimum.
11:12 So, you know, those are the kind of themes we're playing.
11:15 Now, where does banks fall into this?
11:16 Banks should be, you know, at the top of my list, right,
11:19 given that we've been to a $5 trillion economy.
11:22 I think there's still that race to the,
11:24 I'm not saying race to the bottom,
11:25 that's probably the wrong word,
11:27 but this race to get deposits and NIMS,
11:29 you know, it showed up in all of the results
11:33 that I've seen so far.
11:34 And I think, you know, whilst I see the reports
11:38 try to walk through it and say it's okay,
11:41 but every management said it's not gonna get better.
11:44 And I don't think there's a catalyst yet
11:47 for the banking sector to move a lot higher.
11:50 And I think that's what's gonna hold the market back.
11:53 - So just wondering, before we wrap up, Andrew,
11:55 a follow-up to that particular point,
11:58 do valuations at 2.3, 2.2, 2.5 times price to adjusted book
12:03 take care of that lower NIMS narrative,
12:09 or as NIMS go down next quarter
12:14 and possibly the quarter after,
12:16 we may see some more softness in the private banks?
12:19 - That's my expectation is it.
12:23 Best is probably gonna stay where we are.
12:25 The other thing I've mentioned, Niranj,
12:27 just on the banking sector is that,
12:29 you know, the RBI has said a couple of times now,
12:32 we're concerned about unsecured lending.
12:35 - Yes.
12:36 - And maybe they're gonna do something,
12:38 I'll mess around, not mess around,
12:40 work around that by having higher ratios
12:44 for the banks to deposit with them.
12:46 And again, what would that do?
12:48 That would slow down your loan growth
12:51 as well as your NIMS contraction.
12:52 And I think that possibly is what the banking sector
12:56 is telling you it's gonna become.
12:58 - Got it.
13:00 Andrew, always a delight to talk to you.
13:02 Thank you for giving us your thoughts
13:05 on a number of moving parts
13:07 and have a great remainder of the week.
13:09 - Thank you and always my pleasure, Niranj.
13:11 - Thank you.
13:12 And viewers, thanks for tuning into this conversation.
13:14 I'm sure it helped.
13:15 Thanks for tuning in.
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