‘Market breadth has been really weak’

It is time to be cautious as markets are ignoring risks on the horizon, says chief executive officer of Avendus Capital Alternate Strategies, ANDREWHOLLAND. In an interview to Samie Modak on the occasion of the launch of India's first ESG-based (environm

Benchmark indices are at an all-time high. Where do you think markets are headed?

For the near-term, we are cautious. There are many moving parts that can impact sentiment negatively; the market seems to ignoring some of them. There is the trade war involving China. There are problems happening in Brazil, Turkey and Argentina, which the markets seem to be ignoring. Even if one takes a more optimistic view that there is no trade war between the US and China and the global outlook remains strong, it would mean the rate hikes will rise more than anticipated. This will again be a negative for emerging markets (EMs). In that scenario, commodity prices will rise, which again is bad for India. Whichever you look at it, the markets will take some kind of hit. India is relatively better placed as it doesn't have some of the problems of its EM peers. But if things turn negative globally, you will see money move out of India too.

Despite headwinds such as currency weakness and trade war fears, markets have seen a sharp upmove. What could have triggered the latest risk-on?

Currency markets have been volatile but bond markets have been fairly stable, globally. That has played in favour of equity markets. But the market breadth has been weak. If you compare stocks now with January highs, the number of stocks below their one-year highs, as a percentage of total stocks, is a lot. Only a small number of stocks have led indices higher rather than a broad-based rally. Most sectoral indices, too, are way below their one-year highs, which wouldn't be the case if markets

were really booming.

Lot of ETF money is coming. Is there a risk of markets seeing a sharper fall if these flows reverse?

ETFs in India are still quite small. Globally, it may be a big problem and will have a cascading effect elsewhere. ETFs don't buy only five stocks, they have to buy an index. However, given the way markets have gone up, the weightage of some stocks has increased. So, we are seeing concentration in buying some of these stocks. Therefore, if there is a sell-off, the fall could be exacerbated.

In the past, you have aggressively moved towards cash. Can you share your investment approach?

It is not about cash but how you manage that fund. One thing we have told investors is that before trying to generate 15-20 per cent returns, our fund will try protecting capital first. It doesn’t matter how the markets do. At times when risks are high or there are several moving parts, we go to cash to protect capital. Currently, we are about 60 per cent cash. In January too, we were 60 per cent cash. After the markets fell in February and March, we put some money to use and our cash levels dropped to around 20 per cent.

What correction are you waiting for to deploy cash?

As markets fall, we can deploy cash. Our investment committee meets regularly to take short-, medium-, and long-term views of the market. Depending on whether it is bullish, bearish or neutral, we decide how much deployment has to be made.

MF inflows have been strong. Do you think aggressive MF buying is creating valuation imbalances?

I haven’t done any analysis. You had those imbalances working against you when MFs were doing recalibration of different funds. Now, when they are coming back, they want to buy the best stocks, which aren’t getting any cheaper.

How much return will benchmarks deliver in the next two years?

Earnings momentum is picking up. We expect earnings growth (for Nifty firms) to be 15 per cent in 2018-19, and accelerate in 2019-20. Our view is that the market returns will be in line with earnings growth.

What explains growth in alternative investment funds (AIF) industry?

AIFs have given wealthy investors a new asset class to invest in. We only had debt and equity. So, you either take a lot of risk or no risk. What the hedge fund industry has done is to take you along the curve. If your risk appetite is lower than equity, you have something like an Avendus Enchanced Return Fund, which targets high alpha and low beta. If debt returns are going to be 6 per cent, this fund tries to deliver up to 4 percentage points higher.