Investment strategy: Sit on the money now, go for deflation later: Andrew Holland

“I would play the deflation trade through private banks because I’m looking for a recovery in GDP also thereafter through 2023. So private banks are the first port of call,” says Andre HollandCEO, Avendus Capital
Public Markets Alternative Strategies LLP.

Will the Indian market still take time to find a bottom? Right now we have to deal with volatility. Will macro factors really guide the way forward?
This is something we have been discussing for several months now. My opinion is that volatility is going to stay and staying away is probably the best thing to do and I said a lot of people don’t think that sometimes as an asset class cash is king and it’s is at this point indicate.

I can go through all the different scenarios that we’ve already talked about or what’s going to happen, but I would still come back to one thing that concerns me, which is the unintended consequences of what the Fed or any other central bank is doing around the world, including by tightening or shrinking the balance sheet. We’ve seen the unintended consequence of doing this in China and maybe it’s happening in the crypto markets.

That may be where the risk lies, but I don’t know what has been swept under the rug with all that cash. I think the next three months would be the real test of where the issues have been lurking and once they come out we wouldn’t like some of them and that might drive the markets down a bit further from here.

But I don’t want to be too negative because the opportunities are going to present themselves in the next three months to get back into this market and deploy that cash and I still think that at the end of the year we could talk about deflation a lot more than inflation because the world economy is slowing down very quickly. The UK contracted by 0.3% in April. If you look at some of the indicators from the United States, where the balance sheet of American households is very strong, why are they borrowing so much on their credit cards if they have so much money available? I just don’t understand. Now, with gas prices at $5 a gallon in the United States, it’s going to start eating away at their disposable income.

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And a few interesting developments I want to mention that have happened over the past week. Target. which is a retail business, gave a profit warning in that it had a lot of inventory that it would have to start selling at lower prices. It will also be deflationary and it will be the case around the world in many industries now where they would be sitting on stocks they are not selling as the global economy slows down.

The second case involved Intel. At a conference they said analyst forecasts were too high and they were seeing weak demand for their end-use products and that was before they started raising prices or reduce the balance sheet. So I think we’re going to see a very rapid decline in aggregate demand globally.

I would bet the Fed will have to stop raising rates by October because the economy is going to crash. Also, the US 10-year bond yield is very close to the reversal of the gain and it reversed about six months ago, which means they usually end up in a recession. After the high CPI figure in the United States, the fear is that the Fed could opt for a hike of 75 basis points and not 50 basis points on Wednesday and the damage this will do to corporate profits in the coming.

This will be the start of the earnings downgrade, not only globally, but also in India. It will take a lot more. We started the year with 20-25% EPS growth for India expected by most brokerages. It’s heading towards 15% very quickly. I suspect it will head towards 10% in the next few months.

What is the outlook for defensive sectors? Will this be a good place to park some cash?
It depends on what you call defensive these days. Typically, one would put IT in this category, but clearly the correlation is just too high with the Nasdaq at the moment. It’s over 85% and so it has corrected itself. The sentiment is against the sector and the fact is that the IT sector has benefited from the growth of technology. There’s no two ways about it and so if there’s some sort of growth scare in there, computing, in terms of sentiment, will be hit pretty hard as well.

All the factors are there; the rupee depreciates, strong growth in terms of corporate advice, but stock prices are down. This tells us the story that it is played more with feeling.

FMCG remains a favorite among defensives but as I said at the start, money is king. Just sit on the sidelines, I’m not saying stop your sips. You should continue with those. Just sit back there is no need to rush because if I was right in terms of deflation or the Fed stops interest rates in terms of increases by October then trade at risk is coming and this is where FII would come to India towards the end of the year as they will see India outperform in terms of GDP growth and look towards 2023 with a recovery in spending from investment by both government and business globally and locally. This bodes well for the Indian market.

I don’t know the timing because there are a lot of moving parts here but if you want to play a trade it will be the deflation trade and it has to be the banks. But it’s not the banks today because it hasn’t been played out yet and that’s why I say stay away with cash to protect your capital.

You said you are playing the deflation trade and it will be bank names so how would you pick your names because earlier when the inflation trade was going around people were going with PSUs saying that credit growth would be high and NPAs would be very low. How would you play the deflation trade?
I would obviously play it through private banks because I’m looking for a recovery in GDP also thereafter through 2023. So private banks are the first port of call.

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