India Economy

‘Speculators love it when Governments defend currency’

Manisha Jha | Updated on September 14, 2013

Andrew Holland, CEO, Ambit Investment Advisory.

We should just forget about defending the currency and reduce interest rates by 50-to 100 basis points. ANDREW HOLLAND, CEO, AMBIT INVESTMENT ADVISORY

Local hedge funds, which allow investors to make money both from the bull and bear markets, will soon take over the portfolio management business in India, says Andrew Holland, CEO of the investment advisory business at Ambit Capital. With over 25 years of experience in the financial services industry across Asia and Europe, Andrew Holland was earlier Managing Director - Strategic Investment Group for Merrill Lynch in India. He also shares his views with Business Line on the much-feared Fed tapering and where FIIs are putting their money.

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With the currency depreciating heavily this year and FIIs in exit mode, where do you think we have gone wrong and what needs to be done?

When the US announced its QE3 plan, the government held on to the view that its benefits would continue. But when there were signs that it would not, we saw the Government responding in a piecemeal fashion. This ended up choking growth.

I would be bullish if we forget about defending the currency, and reduce interest rates by 50-100 basis points. We must also increase petrol and diesel prices by Rs 5 to Rs 10 a litre. It might not be good in the short term but it is the medicine that the country needs. By doing this, at least you are trying to grow the economy and take care of the current account deficit.

What happens is that, when governments try to defend currency, the speculators just love it. In 1990, the UK Government had decided to defend the currency. They took interest rates from 10 per cent to 16 per cent before abandoning the idea. So you can’t defend something which is weak. We must try and give confidence back to India Inc to attract foreign direct investment.

How will Fed tapering impact Indian markets?

I think the Fed tapering probably won’t be as bad as people are expecting. It is a bit like the old saying that you sell ahead of the war. Once the first bullets are fired, you start buying. We are probably in that scenario in September and we might see some nervousness around what is going to happen with the Fed tapering. But I would be surprised if they go the whole hog on tapering. They would start off with a small amount. A bond yield of 3 per cent is what (the US markets) should settle at. The 10-year bond yield without QE should have been at 2.5 per cent. With this scenario, we could easily see the markets rebound but the problem isn’t over. The government still needs to push through reforms and with elections around, we will have to wait and see if they do it.

What is your outlook on equities?

Before the elections, I don’t see any big V-shaped recovery. It is all about confidence and there is no confidence out there. As we get into the latter part of the year, companies would hold back investments as they wouldn’t be sure of which government would emerge. However, confidence could come back depending on the new government. If it is a coalition government, we could see a sharp recovery but I don’t expect the GDP to take off in a big way.

Elections in Germany and the announcement of the new Fed chairman are two big international events that would have an impact on the bond market.

Have FIIs re-allocated their emerging markets portfolio out of India?

India was the best bet in the emerging market portfolio in rupee terms, until a few months ago. But it is now among the worst performing markets. So I suspect more funds have gone into the safe havens in China. Their currency is strong and FIIs would rather buy into Chinese market at eight times rather than Indian market at 12 times.

After SEBI’s recent clarifications regarding alternative investment funds, do we have a fairly clear regulatory architecture for hedge funds to operate in India?

Ambit’s hedge fund was approved before the clarifications came in. Hopefully with time, SEBI will increase the permissible leverage limits. Perhaps they just want to make sure that in the beginning people at least understand the products as hedge funds are fairly new to India.

What strategy are you following for your maiden hedge fund in India?

While there are hedge fund strategies based on quant and algo models, we will follow a pure long-short strategy, wherein we basically try to make money on an absolute basis every single month.

You now have three or four ways to invest in the stock market-mutual funds, individual investments, hybrid or balanced fund. But these are all long-only funds. In such funds, you are hostage to what the market does. Whereas, in a hedge fund, the fund manager can protect you from some of the falls, because he is always hedging.

Our present long-short strategy allows monthly liquidity and one is not a locked into the fund. In future, we could think about a hedge fund product that would include commodities or interest rates. But that is not our skill-set at the moment.

We will aim to make positive absolute returns irrespective of whether the market goes up, down or sideways. We believe in stock picking as per our view on the markets at a particular point of time. It won’t be a stock- or sector-specific strategy.

Published on September 14, 2013

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