Andrew Holland, CEO, Avendus Capital Alternate Strategies
It has been an eventful week for the markets
that negotiated oil prices falling into negative terrain and Franklin Templeton closing six mutual fund schemes. ANDREW HOLLAND
, chief executive officer at Avendus Capital
Alternate Strategies, tells Puneet Wadhwa
that once stability comes to the global markets
and fundamentals can be accessed more clearly, flows will come back into emerging market funds.
Is the market recovery from March lows sustainable?
Following the massive fiscal packages and central banks ‘backstopping’ the bond and credit markets
globally, all the markets have risen sharply from the lows seen in March. While the fiscal and monetary response from India has been less than other countries, the change in sentiment has led to positivity flowing through India, albeit the market is still one of the worst-performing among emerging markets.
Sentiment has also been aided by the hope that the flattening of the number of new Covid-19 cases has begun and with that, the narrative has changed to when countries and industries can start getting back to work. The question now remains whether the global economy will see a V-, U- or W-shaped recovery. In our view, it is likely to be a long U-shaped recovery, but much depends on how confident people are to venture out and spend money once the lockdown is slowly brought to an end.
How does India look like an investment destination versus the other markets?
From a global investment destination, India is clearly seen as having taken a swift action to contain the virus and will be the main beneficiary of a move to diversify manufacturing away from China over the medium term. The recent deal between Reliance Industries (RIL) and Facebook is a great example of things to come. Unless there is a fiscal response to the slowdown, investors may view India's growth rebound to be slower than in other countries, where there has been a huge stimulus.
How do you compare the current scenario with earlier meltdowns?
We have experienced many market downturns, and economic recessions from the 1987 crash onwards; I have never experienced a time when entire countries, industries, people movement have been completely paralysed. The only certainty is the world is heading for a deep recession. There can be comparisons with other previous events, but much will depend on which industries/companies can survive, the cash flow problems likely to be faced over the coming three-six months and how the consumer will respond. Unless there is a vaccine (2021 at the earliest), people will remain cautious.
Hence, it’s going to be a very slow recovery.
Which sectors and stocks do you think smart money will chase? Will the leadership change?
As in previous downturns, the sectors that perform are fast-moving consumer goods (FMCG) and pharma. Once the economy looks to be bottoming, the leadership will likely be financials, consumer discretionary, materials, and energy.
Will FPI flows return to India soon?
Whenever there is a global event — like we see today — investors’ first reaction is to take risk off the table, and that negatively impacts all the markets, and especially emerging markets. That said, once stability comes to the global markets and fundamentals can be accessed more clearly, expect flows to come back into emerging market funds. Given India's weighting, inflow will be significant.
By when do you see the demand for goods and services and fortunes of India Inc normalising?
We are all still guessing at the moment. No one expected two weeks ago that unemployment in the United States (US) would rise to 26 million. But, our best guess for India is zero gross domestic product (GDP) growth and earnings falling by a minimum of 10 per cent.
What’s your view on the interest-rate sensitive sectors, especially auto and financials?
Both autos and financials have already been beaten down over the past month and there is value. However, if there is another leg down to the markets, it is likely that these sectors will witness further selling pressure.
Do you think the Franklin Templeton issue can become bigger and develop into a system-wide problem that creates liquidity issues for many?
As in previous times, the RBI has stepped in so that mutual funds can borrow and protect funds. This time, too, the central bank is likely to open a window so that the spread can be curtailed.
What more measures do you expect from the government and policymakers?
The biggest problem for companies (globally) is cash flow, and for medium and small companies surviving the next three-six months. A fiscal package to help industries would be needed. More importantly, the RBI needs to backstop new loans given to medium and small companies as working capital. Given that banks would be under pressure because of the existing loans and potential non-performing loans, there is no incentive to take on extra risk.