Market players expect the Budget to be a defining moment that will kickstart the economy...
Market players expect the Budget to be a defining moment that will kickstart the economy, says Andrew Holland, CEO, Ambit Investment Advisory. In an interaction with DevangiGandhi, Holland says the markets may not like the government exceeding its fiscal deficit target by taking populist measures although increased spending on infrastructure may be acceptable. Excerpts..
How do you see the Delhi election impacting the government’s reforms approach?
It was a wake-up call. On the positive side, the government will have to start delivering. We may start seeing some traction in the economy in the next six months before the Bihar elections. On the other hand, it would be a negative if the Budget is more populist. I can understand the government exceeding the fiscal deficit target for increasing the spending on infrastructure, but if it is to make people happy, then the markets won’t like that. After the outcome of Delhi elections, the likelihood of such measures has become a concern.
Do you expect the Budget to add to market volatility?
We were expecting the market to go up ahead of the Budget on expectations of a rate cut and that has played out. Coming into February, we achieved our target and, currently, find it to be overbought. We are worried about globally factors, and the backend of the results season was quite bad. Q3FY15 numbers have shown that the problems faced by banks haven’t gone away. The market started to reflect that reality before the Delhi outcome and we will see more of that when the Budget comes.
I think we all are looking at the Budget as the defining moment which will change the course of the economy, get it kickstarted through spending on railways, infrastructure, power, and roads. The government has to help attract FDI. We also want more clarity on reform issues like the land acquisition and coal linkages. Over the past one year, there have generally been a lot of hope that reforms will pick up pace. And, so, 2015 should be all about delivery. For all the hype that was created, we saw from this result season, that the economy is not really moving.
Do you think the Budget can impact the relative overweight India enjoys among its peers?
India has the opportunity to grab the world’s attention and get more investments. Investors are not as positive on Russia, Brazil or China as they were in the last one decade. The US economy is still at an early stage of a recovery and Europe has a mix of problems. So, where’s the growth in the world? India stands out in that respect.
The other good news is that the interest rates will fall sharply in India. A 25-bps rate cut is already through. I can easily see a minimum 25 bps, possibly even 50 bps, of reduction by March. I expect a reduction of 100 bps for the first half of the year and, in the subsequent two years, another150 bps.
What trend do you expect among FPIs this year? Can the stimulus exercise in Europe and Japan help Indian equities?
It will help, in terms of flows into emerging markets as India would be at the top of that heap. However, European markets are pretty cheap compared to the US, so you may see more money going there. I expect more volatility and a possibility of risk coming off the table. I still think there are factors that are yet to play out in the global markets, which will spook us all. Someone is going to lose in this race of depreciating currencies.
I see more FII money going into the bond market unless the Budget is totally populist in nature, in which case, FIIs will be worried about the impact of these measures on inflation. If we consider a 100-bps fall in interest rates in India, investors stand to benefit if they still own yields. In terms of the currency too, India is a good place to be in.
Which sectors are you upbeat on currently?
We are very positive on the mega supply theme, which, we think, will play out in the next 2-3 years. For example, if the railway infrastructure is going to take off, suppliers of carriages, tracks and related equipments may all find a lot of attention. Even for the development of power, and roads, the companies that supply equipments are going to offer growth as their order book will grow.
What’s your view on the FMCG and banking sectors that have led to Q3 disappointment?
The FMCG sector is benefiting from lower commodity prices, especially crude oil. In the past, rather than passing on this benefit to the consumers and taking a hit on the margin, companies spent more on advertising to maintain higher volumes. However, it was not the case this quarter, as reflected by volume numbers. I do like some of the FMCG names, but right now they are too expensive.
Banks will surely benefit at a time when interest rates are coming down. In the last cycle when the interest rates fell, banks used that opportunity to clear out their balance sheets. I think that could happen again. If some changes are made in the policies for quick recovery , it will be good for public sector banks as well ,though it will take some time to reflect. So, currently, we are sticking to quality, but at the same time tracking PSBs where things are improving, as the pack offers value.