stock market outlook: What decoupling? India has always been a domestic driven economy: Andrew Holland

“I am not so excited by traditional plays like L&T or . I am looking more at companies like , as they are probably going to benefit more from the latest capex cycle,” says Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies

Do you think there is a probability of markets making a new high before Diwali? I am not talking about Bank Nifty as that is almost at a new high.
It could well do and I wouldn’t be surprised on the upside if it did, let me put it that way.

Why would we make a new high? Somewhere there is a realisation that global markets are completely bombed out. In Europe, it is a case of eat or heat – heating your homes or eating your food. When that economy is going through this kind of a grinding challenge, can Indian markets move higher in isolation?
The point you made is when are global markets going to take this hit? All the pointers you talked about are very true but we saw markets moving up on Friday despite the ECB raising rates. It is hugely confusing in the UK. Yes, they are helping the households who use a lot of gas and electricity but are the businesses going to be rationed? Are they going to shut down? Are they going to increase prices? It is the same in Europe as well and it is just heading to recession.

stock market outlook: What decoupling? India has always been a domestic driven economy: Andrew Holland

Now, the US is holding out a little bit stronger but the rate hike is coming up again. A 75 bps hike should be the base case along with quantitative tightening (QT) and it is going from $45 to $95 billion a month. This is going to have some impact and it depends on whether the markets globally fall before we get Diwali here because that is the key.

But there is a narrative around India decoupling. There was a similar thought, back in 2007 going into 2008. We can talk about decoupling, but from a global economic and financial angle, India cannot be decoupled. Yes, one can say India is a domestic driven economy and so it was in 2007 as well. That has not really changed. I am not into this decoupling kind of theory at the moment as a way of why our markets are better.

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What is your outlook given the way we have seen the market cap of some of these heavyweights like has grown?
If I am looking at the sectors which I want to be in at the moment, given that I am more wary of valuations in India and the recent upmove, but there are two sectors I like; FMCG and telecom because that is where I know I am going to get steady growth.
I am not sure if I am going to get that from any other sector. The deflation trade involving banks and autos has already played out. It has been a great run and if I am to put money elsewhere, it is FMCG and telecom now.

I would like to draw your attention to what is happening in the multiplex space. One after another, none of the Hindi movies are doing well. Should one avoid buying into multiplexes considering that this was one of the most popular opening up trade?
For the opening up trade it was a very popular, very good one as well. I still think the way to play the continued opening up of the economy is through the hotel sector – the services sector. But if I am going to be hostage to whether the films do well or not, then that is something I am not capable of baking into my forecast. I would rather look at the fact that the people are going to travel and occupancy rates are very high and so are prices of hotels. Airlines and hotels are where I see extra spending over the next six months.

The capex theme has really been boding well. Would you be looking at pure play capital goods companies? Do you like stocks within the infrastructure/real estate basket or any other themes within the space?
The big theme we have of India and globally is that capex cycles will come from governments and companies but it is not going to be the usual roads and bridges. It is going to be particular industries where either there has been a supply shortage or there are worries about overexposure to one country like China. These are two things countries are going to spend their money on and companies as well. One will be defence spending and the other is renewables. We are going to see investments into those particular industries and I would include semiconductors as that is something that India will need going forward and companies both in India and outside of India will look to building capacity here for the future consumption growth that we are going to see from India. That story is not going away from India for a very long time.

So I think that is where the capex will be. I am not so excited towards traditional plays like L&T or BHEL. I am looking more at companies like Siemens, ABB and so on as they are probably going to benefit more from this capex cycle than the usual roads and bridges.

How would you play the IT sector from a fundamental standpoint? Having seen the overall valuation metrics and returns within the IT space, is it safe to say that there is going to be a consensus call across the space or would you categorise it as large caps vis-à-vis the midcaps?
I can paint all IT stocks with a broad brush. If the correlation remains as high as it is with the tech stocks in the US, then that is a call you have to make and it is that simple or that difficult.

In case of a global recession, especially in the US, I still think there is downside to the tech stocks over the next six to nine months and I do not think Indian IT stocks can withstand that. The sentiment will be against the sector. But that does not mean that the valuations will become attractive in that time but it is just not a focus sector for us.

If you are going to say let us think about when the Fed stops hiking rates, when inflation is probably looking under control, what will be the next step?

The next step from that is going to be obviously the fact that we would be thinking about when the interest rates will fall? But how do you play that? It is going to be banking, domestic consumption and consumer discretionary stocks, which are going to give very strong returns. IT will take its time as the global economy recovers but for the time being, I do not need to be in IT.

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