Poll Position: Rock-solid Investment Strategies For Elections with Andrew Holland of Avendus Capital

[Music] [Music] [Music] [Music] [Music] hello and welcome to money control as we get closer to the election verdict we Kickstart a new money control conversation series on how to navigate this crucial time in the market we are in the last leg of the general election 2024 and the countdown to the election verdict begins now with the date of counting just one week away so far the market seems to be in a happy mood uh does this signal a good election outcome how do you position yourself at this stage to protect yourself from any risk as well as to take advantage of any opportunity the market throws at us I'm mahalakshmi and I have with me Andrew Holland CEO of avenders capital who joins me today to help us devise a strategy to navigate this very crucial time thank you so much um Andrew for joining meet this morning oh it's a pleasure thank you for the opportunity so Andrew first off what is your sense on what kind of verdict are we expecting what kind of verdict is the market expecting yeah so the markets um obviously become a lot more confident um regarding the kind of uh uh incumbent government continuing um now we could debate on the kind of margin and so forth and I think that's what the Market's been trying to do um but it's seems to be voting with its feet at the moment uh in terms of you the market making new highs despite the FI selling but I think the big um that you know the big impact on the market was actually the RBI dividend um which you know to my mind was huge uh great for the banking sector um you know great problem for the for the any government to have in terms of you reduce your fiscal deficit which will any way reduce bond yields and and obviously from a sovereign wealth uh perspective Ive um you know mood is and the other rating agencies will have to look up very closely or do you you know spend you know we're all kind of comfortable anyway with the fiscal deficit going forward uh and therefore you could you know Kickstart the uh continuous continuation of the infrastructure spending that the government's been doing so I think the combination of these factors M lash has kind of just given that extra boost to to the market and one of the big lards as we all know has been the banking sector um and that that's been a nice filp by the RBI dividend to the government which if it brings down bond yields which could be the case in uh in June with obviously the inclusion in the JP uh JP Morgan uh Bond index um you know would be good for banks in terms of their uh government Holdings as well in terms of bond yields falling and prices going up oh absolutely this 2 lakh CR Bonanza is definitely something I wanted to talk about uh but before that I want to get this election uh thing out of the way so uh are you suggesting that the election risk the market at least suggest that the election risk is somewhat over yeah I'm not saying it's over because obviously there's going to be I'm sure some kind of uh uh kind of rumors around but I think from those early days of of worries about the voter turnout and when that was kind of corrected by uh by the real kind of turnouts I think that gave the market some more confidence um and and and that's what we've been seeing now in terms of the sectors which were um probably the big beneficiaries uh of the you know the government continuing and the policies continuing you've seen some big big moves in those sectors which is indicating that that investors are getting more comfortable correct all the questions I want to ask you already you're already answering so uh but back to elections uh is there a threshold number that you have in mind that uh you think the markets will really react adversely too and on the contrary is there a number that you would say beyond that will set off a Fresh Rally from here on see it you know it's very difficult to guess what the Market's going to going to like or not like um I think what the market wants is no uncertainty um continuation of the policies and if they get those two factors um then they'll be happy it'll be a happy Market that's for sure sure is there any way of for you to lay down the different scenarios and you know probabilistic kind of a uh uh if you can lay out everything probabilistically what do you think what do you think for example is the probability of a 20% up move um post election uh and a 20% up down move for this year so that should be an easier question to answer then we can narrow down the time frame and look look at other scenarios the way I'd answer this is is um uh maybe not exactly pinpointing in terms of the answer in terms of index movements um but what I would say is that if uh you know the market will probably do all of its kind of up move this week if if uh if if the Market's believing that U it's going to be a good result for the uh for the incumbent government um and I think that's what you'll have to look at so when when it comes to like um you know the 3D of June fourth of June we'll probably have the exit polls and a lot of the hard work the market would have done uh depending on you know whether it's a surprise to the downside or the upside but a lot of the the market will we be moving this week uh is to to my to my view thereafter is the key right um is is what is the budget going to be like um and is it going to be anything to do with capital gains tax and you know we we we talked about this before um you know we keep um hearing that the could be something on capital gains tax um now whether that's duration in terms of holding stocks for longer or whether it's an increase don't know um but that could be one of the things which would um kind of have the markets concerned in the very short term after the elections sure so uh Mr Modi has I mean the Prime Minister Modi has said that you know on 4th of June we're going to see a new high uh the market will climb higher uh do you think that could set off a kind of a peak before elections because will that be the point from where nervousness about the budget will begin or or that depends upon the upon the verdict itself yeah I think it really depends on the verdict itself for that day of you know the election results um of what kind of magnitude the market moves um but there thereafter again we'll very quickly think about two things the first 100 days uh of the government and what they what they're going to be doing and then next would be you know what's what's what's in the budget and what what's going to be uh what What's going to be of any concern if anything sure tell me I mean if the market gets an outcome like you know 270 seats for BJP and 340 350 for the NDA that's pretty much on expected lines it's nether here nor there it's something that the market will very happily take will that set off a 5 7% Rally from there on is it possible or it you know Market will just take that and there on you're just you know starting to look at the budget actually it depends on how much the market Rises this week ahead of thosee of those there numbers so it depends really on the market level sentiment itself will not do any you know in incremental Rally from there on is that what you're saying it could well be unless there's a you know a big surprise on the upside which the market hadn't been expecting that could uh would could could further lead to uh markets moving higher um and but you know we would then have to wait for the policy for the next 100 days and then the budget those are the two key events I I think after the after the elections which the market will focus on very very quickly okay Andrew one question uh again on on the event is you know how do you uh how do you cover for any potential risk and how are you doing it in your own funds I mean you also have this uh long short fund uh do you uh have you hedged yourself for any potential risks that emanates from that day uh or have you increased any cash position to create room for extra buying in case there is a correction that uh that comes in how are you playing it so with with you know again my I think this week is a crucial week and I think um we'd rather going to think about this week rather than positioning for a day of the election election results um I think you know by the end of this week we'll be looking again and saying you know where what is the market saying to us um and you know what are the expectations you know that Market's kind of pricing in uh at the moment uh you know I think the market was not pricing in uh the RBI dividend for for banking sector and it's been a a hugely under performing sector so and and as you know foreign investors have been using this as a as a as a sector which they've been either shorting or uh using as a you know a way of funds to invest in China um if they come back they're going to have to come back and up up their weights in the banking sector so I think that's that that's the Catalyst I think the markets um moving on at the moment um as well as you know optimism uh from where we were a few weeks ago in terms of the elections sure and you talked about you know fi selling which has been true but except for the last two sessions on Thursday and Friday you know the we saw quite some purchases from fiis do you think there is money waiting on the set Sidelines only to avoid this event risk that could flow in just after election if the outcome is good see you know to some of the foreign investors I think two two things have happened one um there was a feeling that they can't miss out on China I mean China has perform very well recently um and um you know that fear of missing out on a very attractive in terms of valuations Market is something that investors do not want to do so they've been using India to some extent um as a kind of you know a funding uh part of their their their exposure for for moving into China um I think um I think they got caught out with the with the RBI dividend to be honest and that's why you saw a lot of buying more short covering than anything else um but I think what foreign investors will do is that you know once they see that you know policy uh is going to continue that uncertainty is taken away um you know given the weightages in in in the msii as well um I think they'll have to come back in the financial sector is one area which they've um you know been consistently selling for some time that they will need to come back to to to to buy sure and you said post election obviously the focus will be on the budget that'll be the next big trigger but that apart what do you think will be the key triggers uh for markets from uh for the month of June I think for the month of June would obviously be you know the the kind of layout of the 100 day policy from the government um in terms of you know is there anything different than what we were expecting is it um you know will we hear anything about the the RBI dividend and how that would be uh utilized would it be you know to to reduce the deficit or or increased spending I think that would be one of the key key events I'd be looking to to see what the government want to do and of course we'll have the um inclusion in the uh JP Morgan Bond index and that that should see uh hopefully foreign investors come in and start buying into government bonds and that should bring the bond yields down in India uh which is again good for the banking banking sector so overall those are kind of I would say more Market moving events um you know in in the month of June as we head into the kind of expectations for um for for for the budget and how do you see the FED piece I mean is the is the um uh are we sorted that a Fed rate cut is indeed coming in September uh are risk from that FR front completely uh negated now you know I think the market is just is just overlooking what the Federal Reserve is saying I mean it's been pretty much all over the place uh over the past year or so and um you know whilst um you know if you go back to November uh December when the chairman of the Federal Reserve was you know very dovish uh we all thought interest rates were coming down but inflation has been a lot more sticky jobs have been a lot more kind of buoyant uh than they were expecting so I think the market is now saying you know listen something might not happen this year it's okay um but M as as you probably noticed well is not just flowing into equities even though you know most Global markets are reaching new highs um is it's going to other asset classes as well whether that's gold silver U Metals um you know crypto and so forth so you know risk appetite is still there uh even if you're not getting the kind of performance from the index apart from if you're holding I'm talking about the US now unless you're holding you know one of those seven magnificent stocks which keep going right but uh again uh Andrew unless a rate cut becomes a reality do you think U fi can come to our markets in large numbers do you see a large uh inflow flowing in after elections because at least the uncertainty would have you know we would have us we would have gone past the uncertain phase but uh in terms of uh the risk on trade itself a 5 and a half% uh Fed rate doesn't you know allow allow for any room for money to flow out into risk Assets in large numbers would you agree see we got to we got to U well it is Flowing out to risk assets right because it's going into Metals gold um you know it's going into other asset classes um which you know I could say you know are not Equity uh in in that respect so you know that that is um something that investors are doing I think so that is how do you read that because that looks like more a you know a dollar trade uh than you know a market trade you know it's see the dollar yeah but the dollar hasn't really moved has it I mean it's it's been stuck around that 103 105 level so it's not uh it's not as though it's been a significant uh you know kind of increase in the dollar um you know against other currencies so so how do you really explain this Andrew this money moving into other asset classes apart from equities I mean it's not that you know flows into other emerging market equities has been great either it's not just India agreed because you have um you have one big Emerging Market uh which there's still you know a debate going on about which is China um now we've had you know what a 8 n% rise in the kind of Hong Kong kind of China index and usually the the underlying China index will follow that um but it's not been a whole weight of money so what happens is that once that you know kind of China once the feeling that China's really kind of Hit the bottom which most people are now betting on then you're going to get more and more flows towards Emerging Markets now a a large proportion of that will go to China but some of its way some of it will find its way into India as well because of the weightages that we have in msci just just to keep the weightages there so I I think we will get flows um depending on you know how the budget goes in one as um but you know in terms of valuations whilst we're not we're not a cheap in terms of valuations at the moment compared to some other markets uh I think it's the stability I think it's the growth Prospect uh in many different areas of India so maybe the index M actually is something I wouldn't look at so much um I would look at the underlying themes that are going to play out over the next one to two years which is probably where you're going to make most of your money right you mentioned you know the same stocks that have been rallying in the past which is largely the power pack the capital goods sector all the economy sensitive uh uh stocks and of course Banks uh lately after the uh dividend uh RBI dividend uh is that the pocket to focus on for you also over the next over the course of the next year yeah it hasn't really changed since we we spoke before it's it's kind of the you know the government spending so we know they're going to spend on defense as as every other country in the world is Renewables Railways those are the the key areas um which the government's going to spend on now within infrastructure you know I would kind of tend to go more towards the kind of those companies where you know it's more the smart cities Railways uh smart manufacturing those are the kind of companies where I think you'll find uh margins will just uh continue to kind of move uh significantly higher over the longer term and then the other themes to play out obviously premiumization uh and and with there within fmcg we're looking more the beverage industry uh where we think it's still a a long Runway um in terms of growth and margin expansion and finally is is obviously the Leisure sector um in terms of uh you know we're all spending more money we're all going to be traveling more um and there's a limited amount of rooms that are going to be uh you know brought into in into uh in in in in the next one year so you know you're going to see um uh Revenue yields there for for for the hotels continuing to expand and we're all looking for new experience so I think I think that's what's going to uh Drive the hotel sector and the Leisure sector going forward sure I agree with the consumption part uh Andrew with the you know investment Le stories is there any particular pocket that you could call out which uh which you think maybe high priority at least it looks like it could be high priority for the government because within all these whether it is the uh you know power finance companies or generation companies Renewables all of them you know they small Pockets but Railways defense manufacturing all of these but these also keep on rotating it's not that all of them uh you know go up in uh in a straight line uh are there any particular Pockets that you think are now ripe for uh the next leg of the rally and some that you think may just have gone a little overo in terms of valuations and may see some kind of pullback or just remain at the same level let me put that in slightly different uh context um if I take um anything to do with infrastructure and I'm talking about Railways as well and defense at the same time is share prices move on U order books so if you expect in the first 100 days or more that the know the the government will um kind of execute or give out more orders this is what's going to push these share prices higher I mean we'll have to wait till see what the execution is in terms of the profitability but that's what's going to push the share prices of of of these companies going forward so I I don't think it's just necess that the um you know you would say that um the Pees at the moment based on the order books you have are where they are but if if if that's grown by you know one to two times over the next two to three years then you have to look at a different earnings projections for those companies so I think we're just a little short of that uh idea of the of the longer term uh prospects for some of these companies uh the other sector that I I should have mentioned was the electronic manufacturing sector which I still think is at the very early stages of uh of um you know fantastic growth going forward yes mixed results by some of companies but this is what you you you expect when a industry is trying to grow with the the kind of capacities that they're trying to bring on board um and and along the way you know you will see those diping earnings before you start to see the margins improve uh and the benefits of the capacity expansion coming through so um great sector to be in I think for the longer term sure what else would you be looking for from the government in the you know soon after the elections uh you talked about ordering for public sector for for you know essentially order ordering by the government itself but apart from that anything else no I you know I think the Market's been very happy with uh with what the government's been uh you know doing in terms of leading the infrastructure spending and of course my lash as we all know that has a multiplier effect across different parts of the uh of the economy you know whether it's then you know construction materials to uh to paints to um you know Furnishings all of these things start to start to play through as the uh as the expenditure continues so I think all of the these things um have a have a big difference and I'm sure you know um we'll have a big difference in how we can ACC commute going forward and of course with all the roads and highways being built um it it brings itself to kind of New Towns uh being built hotels coming in and then Conference Centers so all of these things it's very difficult to put a you know you'd have to go and visit all of these places but that's what that's what happens and that's where the multiplier effect really starts to kick in for the economy and that will push earnings uh growth a lot higher going forward over the next two years right Andrew you mentioned you know the worry about capital gains tax um in in in the budget and that's a that's a common worry and I hear that from almost uh all Market participants now uh it's as if uh you know it's already clear that it's going to come in so um how do you think that will it be would you see it as hugely negative for markets if there were to be some tinkering on capital gains tax it depends what they offset it with um you know if it was uh say you know reduction in income tax um which you know obviously benefits a lot more people um than than capital gains tax on a smaller number of people maybe it's a holding period um but I certainly think they'll do something with um with tax on U you know which would help the kind of um uh banking sector so for example the Arbitrage funds enjoy Equity taxation for a risk-free product which is more bond-like uh but has different taxation so that could be some some area that they'll look at more closely but I think overall um you know it depends on what the offset is to if there is a capital gains tax increase at all um you know maybe it's another year out uh the government might want to have but you see you can't if you're going to get to a 10 to 20 trillion dollar economy um it can't all be funded by Equity your debt markets have to uh help to to build this too F enough so you're saying uh in itself we cannot conclude that a capital gains hike will be so negative for the for the markets is that what you're suggesting because Arbitrage funds like you're saying seems like a for you know foregone conclusion because every year they have been plugging some Arbitrage tax Arbitrage opportunity or the other and I think this is the only only pocket that right now looks like an AR Arbitrage and assets out there have grown grown from I think 40,000 crores to more than 150,000 crores or so so that looks like a no-brainer but I'm talking about Equity capital gains tax if there were to be some kind of tinkering with that um uh will that have a huge impact see it would have a it would have an impact initially um which is always you know the markets never like any tax right right so whichever way I look at it markets don't like so um but you know once that all settles down um then you go back to the pure fundamentals and uh if the if the fundamentals of uh of the of the markets remain very strong uh and the economy too then you know this is still a way to to make uh more money uh you know in in over a longer longer period of time so you know it's not as though um um other other countries don't have higher couple of gain taxs and the markets aren't reaching new highs sure um Andrew one last question what is your sense on you know public sector companies as a whole uh considering that the valuations are what they are uh nearly close to you know uh to the to to to their peaks um would you think there is more room to uh for these stocks to go up well you know a lot of these um PSU stocks land into sectors like you know defense and Railway um and so forth so you your choice on the on the private kind of side of it is limited um so of course if if orders are going to come into these sectors they're going to land in a lot of these companies hands so you know the prospects for those companies are you know remain very strong it's really again it goes back to my is the execution and unfortunately we're going to be a few a few quarters few years out before we can see how well they execute so that's a different uh a different subject but I think if uh uh the PSU uh sector as a whole uh will continue to do well you know if you take the banking sector for example um you know bond yields were to fall it's the PSU Banks which would benefit the most yes from their government holding so you can't take that away from them and say well the valuations are here and there um it's something that uh the market would uh would want to price in very quickly in terms of um in terms of increased share prices so sorry one last question what what do you think are the key risks from here and what are your top three bets I know that you've already mentioned Banking and the uh you know premiumization uh Trend uh anything else and pockets of Investments but if you can pick three uh three of your top bets I think you've I I have mentioned in my it's very difficult to have new new new ideas and new you kind of new views um in terms of you know our economy it's it's a domestic driven economy really um therefore you know I'd like the kind of electronic manufacturing set because it's not just domestic it's also potentially exports as well going forward so that would then depend on where the rupee is against the dollar um and whether the dollar is going to be stronger or weaker and of course we've got the US elections uh coming ahead uh in November and typically markets in the US have have a a reasonably good run ahead of the elections and of course um people like uh uh Trump because he's usually Market friendly U maybe some of his um other policies are not so Market friendly but uh the markets like him sure and the key risks to markets from here on I think the key risk is is is as always um two two things one is complacency um in terms of you know if if you go back a few a few months ago uh my Me Maybe it's even Shor period you know it was um buy India you know sell China and how that how that reversed in terms of foreign investor sentiment um so risks of just being were the best uh and there's only one place to kind of invest money is something um you know we have to be wary about and two is um obviously companies um you know in India looking at where they think um it's easy money to be made without having necessarily the expertise uh to do that so those are the kind of things that I I I tend to look at um you know we saw it last cycle right companies you know deciding that they become asset managers um asset management companies without any expertise at all and then uh you know has a big dragon earnings going forward oh absolutely thank you so much Andrew it was a pleasure talking to you as usual thank you so much for your time thank you again [Music] [Music] [Music] oh

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Length: 30min 30sec (1830 seconds)

Published: Tue May 28 2024