‘China’s slowing growth is a big concern’

PRIYA KANSARA Mumbai | Updated on January 12, 2018 Published on June 08, 2017

ANDREW HOLLAND, CEO, Avendus Capital Alternate Strategies

The road ahead for the Indian equity market seems to be hit by speed-breakers in the form of such as short-term disruption due to GST, hit on GDP growth post GST and slowing foreign fund flows, according to Andrew Holland, CEO , Avendus Capital Alternate Strategies. Excerpts:

Do you think India is prepared for GST on July 1?

Our ground check with companies show that many (especially in rural and semi-urban areas) are not ready. I am not sure whether the banks are ready. So, there will be a lot of disruption. Problems are going to be there but it’s better India just goes ahead with it because in the long-term, GST is a great positive. Overall, we anticipate at least three months of disruption but it could be more than six months in case of India.

What impact can it have on GDP and earnings growth in FY18?

FY18 growth could be hit as transitional economic disruption due to GST may neutralise the lower base of demonetisation in FY17. In addition to this, growth will remain subdued due to slower government spending, agricultural growth and private investments.

We expect further downgrades in FY18 consensus earnings, which always started off with 20 per cent in the last three years. We are factoring in GST disruptions and expect 10 per cent earnings growth in FY18.

What is your view on global economies and markets?

It’s a liquidity-driven rally across the globe. There is low volatility and high complacency. Nobody is worried what’s happening in the world. Markets are going up anyway. That worries me.

Investors are ignoring risks such as China’s slowing growth quicker than expectations, protectionism, UK elections and geo-political tensions such as the recent one in Qatar. However, on the brighter side, global growth will finally pick up, starting with the US, followed by Europe and Japan.

What is your view on the Indian equity market, which is near record high and richly valued?

I expect 5 per cent correction on the benchmark, and a painful one. It will be higher for small- and mid-cap companies. India will not be a huge beneficiary of global growth because it is mainly a domestic-driven economy.

Foreign flows to India will slow down (which is already happening), as they will be chasing exporting countries on account of return of global growth. Consequently, I expect incremental SIP flows into mutual funds also to slow down due to expectations of range-bound market movements.

Some companies and sectors (such as auto components), which are exposed to global markets, will gain. But this is not applicable to sectors such as pharmaceutical and information technology.

Having said that, I am not overly negative on Indian markets. I expect the benchmark to mirror our earnings growth expectations.

So, you expect more pain (correction) for IT and pharma stocks?

Definitely. The decade of growth is gone and not coming back. IT and pharma have entered “ex-growth” phase due to intense pricing pressure. The de-rating of the sectors have some way further to go given the outlook on growth and margins remains subdued. So, out of a five-year period, IT is in the second year of pain and for pharma it has just started.

Which sectors do you like?

While I like the theme of domestic urban consumption, I am extremely bullish on the FMCG sector. They will be big beneficiaries of GST.

Their volume growth and margin expansion will see huge uptick as companies will pass on the benefits of lower costs coming from single or less warehousing facility. But this will not happen immediately.

I like private banks despite expensive valuation, as PSU banks don’t have the capability to do anything even if growth recovers.

There is no magic wand with the RBI or the government for resolving the NPA (issue).

Published on June 08, 2017
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