Feel constructive towards markets with Nifty near 15,000: Andrew Holland

The markets are quickly coming to the realisation that earnings are likely to disappoint, and that analyst forecasts are too high, said Holland

It has been a forgettable first half of calendar year 2022 for global financial markets. As the markets now prepare for the second half and the June quarter earnings season, ANDREW HOLLAND, chief executive officer, Avendus Capital Public Markets Alternate Strategies, tells Puneet Wadhwa in an interview that markets are coming to the realisation that earnings are likely to disappoint, and that analyst forecasts are too high. Edited excerpts:

Some experts believe the Fed’s tone on tackling inflation shall be softer in the second half of CY22. Can the markets bide time until then, or have we headed lower anyway?

Our view has been that the Fed will stop hiking rates sometime around October. We also expected earlier this year that the UK/Europe was heading quickly from stagflation to a recession, and that the US economy would head the same way, albeit possibly skirting recession. So, rate hikes and a reduction in the Fed balance sheet would lead to aggregate demand falling sharply. Even the Fed chairman warned of “pain” ahead. Currently, there are two main concerns for the markets. First, whether monetary tightening will lead to unforeseen consequences, such as the one we are witnessing in the crypto market; second, whether company earnings forecasts will be reduced sharply. This lends itself to volatility remaining elevated at least in the very short term.

What are the top three/five factors that global equity markets will watch out for in the second half of CY22?

On the positive side, the factors we would be looking for include the Fed halting interest rate hikes, a ceasefire agreement between Ukraine and Russia, a further fall in commodity prices alongside supply chains gradually moving towards being fully re-open, and US bond yields falling.

On the negative side, the factors we are keeping eye on are any unintended consequence across asset classes as interest rates rise, tightening by the European Central Bank (ECB), the Japanese yen depreciating further (which can lead to other emerging market countries devaluing their currencies to compete), and escalation in the Ukraine-Russia conflict.

Are the markets pricing in the possibility of deteriorating macros if oil prices tay elevated in the remaining part of CY22?

Amid recent lows for the markets globally and India, we felt that most negative impacts of stagflation/recession are being priced in. However, as mentioned above, the unintended consequences of monetary tightening and earnings downgrades may still tilt the markets lower. Overall, we feel more constructive towards the markets at Nifty nearer to 15,000 levels.

What are your expectations from the June quarter earnings season?

The markets are quickly coming to the realisation that earnings are likely to disappoint, and that analyst forecasts are too high. That said, there will be certain sectors where input costs cannot be passed on and volumes are falling as demand slows down. For example, the automobile sector is most likely reflecting the poor outlook for near-term earnings. But as commodity prices fall and supply chains normalise, this sector will be the first to witness earnings recovery.

What has been your strategy amid this volatility? Sector(s)/stock(s) on your shopping list or are you a fence-sitter amid this crisis?

As a hedge fund, we have kept cash high to protect capital over the past few months.

Are your high net-worth clients willing to loosen their purse strings given the fall we have seen in the markets in the past few months? If not, what’s holding them back?

Most clients we meet are waiting for equity volatility to edge lower before entering the market. At the same time, they’re not rushing into fixed-income products, given that the Reserve Bank of India (RBI) is likely to raise interest rates further. So, most are sitting on the sidelines and ready to deploy funds in the debt markets to fix higher yields going ahead. On the equity side, investors are looking more closely at funds that offer upside with some form of downside protection.

Equity SIPs have already taken a knock in May. Are mutual fund (MF) and retail flows into the markets, too, at risk if the overall pessimism persists?

This, I feel, is temporary and anyways has held up very strongly against the backdrop of investors not having made money for nearly a year now.

Is there more pain in store for commodities? How should one approach related sectors?

There is probably mo­re downside to commodity prices given the global economy is slowing rapidly at present and will likely need for interest rates to be halted before finding favour again.