Any signs of a hard landing in China may lead to a growth scare, says Andrew Holland, CEO, Investment Advisory, Ambit Capital. In an interview with Fe’s Devangi Gandhi, he says such a scenario, however, may turn India into an interesting market for foreign investors as it would gain further flexibility to reduce interest rates.
How far do you feel has the Union Budget for 2012-13 managed to meet investor expectations?
The expectations from the Union Budget were very limited and, in that sense, it has not failed, even as there were no major tax reforms announced. The two key developments foreign investors generally look for are whether the government is doing enough to keep the consumption ticking along and if it would continue to put money into infrastructure. The Budget seems to have met these requirement broadly.
What is your near-term outlook on the markets?
All markets went up so quickly in January that they took everyone by surprise — there is still a lot of cash waiting to enter the market. All it needs is a strong indication from US Fed officials that they would pursue another round of quantitative easing. Going ahead, we think Europe will continue to grapple with its problems and it may require throwing in more liquidity even as the US continues to recover.
Oil prices are likely to come off as a slowdown in the Chinese economy would lead to a decline in commodity prices. If oil prices come down, inflows into India would sustain. This is because the Indian market is reasonably priced and interest rates would continue to fall even if at a slower pace.
What, according to you, is the biggest risk to global recovery?
There are two real risks to global recovery at this juncture — the Iran conflict and its impact on oil prices and any possibility of a hard landing in China. If China’s GDP growth slows down drastically from the current expectations of 7.5-8% for the year, that could come out as a big negative for the markets. Such a development may be perceived as a growth scare, which may take global markets down. Some risk may be taken off the table as people ascertain the impact of China’s slowdown on an already muted growth trajectory of Europe and the US.
India, however, could benefit from such a scenario because, generally, a slowdown in China brings down commodity prices, including that of crude oil. Unlike, Brazil and Russia— among the Brics nations — this event may help India stand out as it gains flexibility to reduce interest rates. So, declining interest rates and commodity prices, along with a consumption driven 6%-plus GDP growth, may turn India into an interesting market for investors.
Has the shift towards interest-rate-driven sectors paused?
After the Budget, investors appear less bullish on banking stocks even as higher oil prices have affected expectations of rate cuts by RBI. Bank stocks have come off the highs reached in mid-February. However, our view is that the Budget had nothing to do with the change in the growth trajectory; interest rates will come down, given our view on crude oil and commodity prices. Therefore, we have got more conviction for buying interest rate sensitives. However, we have kept to private banks rather than PSUs. Among Infra companies, we are comfortable with larger players like L&T and BHEL, looking at the considerable growth built in the economy. We don’t like power companies because of the coal supply issues. We don’t tag an either-or equation between the consumption-driven and interest rate sensitive sectors as the domestic consumption story would remain strong even as rates fall. Hence, we also continue to have some consumption-driven stocks.
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