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Editor’s Note: The Indian growth story over the next two-three years remains very positive and foreign investors (FIIs) who have been sellers in recent months will come back soon, says Andrew Holland, CEO, Avendus Capital. In an interview with News9 as part of the series Market Mavericks, Holland says he is bullish on the hospitality, telecom, AMCs and consumer discretionary sectors. Edited excerpts:

Q.1. What is your view on the Indian stock market? Where do you think it is headed and what are the factors that are likely to impact the market?

This is something we are being asked more and more because in the last few months we are seeing quite a lot of volatility in the Indian stock market. Foreign investors have been selling quite heavily. The Indian stock market has been one of the best-performing markets in the world this year. So, what we are seeing is really a reallocation by foreign investors to some of the markets which they think may be cheaper.

For example, China, where we have had a lot of regulatory problems and the markets haven’t done well. But now that seems to be settling down. It is a cheap market relative to India. So, in that respect, money flows have been moving out of India and relatively moving towards China. I expect that to continue for a little while as the realignment happens.

In terms of volatility, I think that’s what’s been happening globally. I think we are still grappling with the inflation outlook and what that really means. For most of the year, the US Fed has been saying, along with other central banks, that it (inflation) is going to be transitory. Now they say forget this word ‘transitory’. So, obviously one now thinks that inflation is going to be sticky.

As a result, the expectations regarding tapering is that it will be a lot quicker than expected and by March the liquidity help to the markets is going to move away. Interest rates could move up as early and June-July next year in the US. So, that’s what the markets are trying to grapple with.

Has the Fed made a policy mistake? Should they have tightened a bit earlier? Were they looking at the wrong factors in terms of inflation? That’s what we are going to grapple with going into the New Year. I think volatility is going to remain a little bit longer for us, going into the back end of this year and into the New Year.

Q.2. What impact do you see of the emerging COVID-19 situation with the new Omicron variant spreading fast across the globe?

Again, it’s on top of our minds. We came into 2021 with a huge amount of optimism that the vaccines would move us all through this and we would get back to normal. The new Covid-19 variant, Omicron, has really not quite spooked the markets because the good news is that whilst it’s highly transmissible, incidences of hospitalisation and deaths have been quite low.

So, the hope would be that with the extra booster jobs that people are getting in the western world, we will see a peak maybe in the next few weeks and we can move on. I suppose the risk, of course, will be new variants around the corner which we are still to find out about.

Q. 3. You said there are a lot of moving parts, what advice do you have for retail investors? Big investors like FIIs are moving out. What strategies should individual investors adopt? Is it time to raise cash levels?

I think in the next two to three years, the factors for India remain very positive. You will get blips. There will be corrections on the way, but I don’t see anything that will take away the longer-term prospects for India. We are all seeing consumer spending and the government will start their infrastructure spending soon which will have a great multiplier effect. So, there are a lot of positives and tailwinds going for India which are too difficult to ignore and given the problems in China a lot of companies are seeing India as the growth engine of Asia and also a move away from China is happening.

So, we might see a lot more foreign companies coming into India through FDI, not necessarily through the equity markets. Retail investors have been doing a great job. Even when the pandemic happened, SIPs continued at a very high rate and they have been increasing over time. So they should continue what they are doing, sometimes buying at the bottom, sometimes at the top and sometimes at the middle.

As long as you are investing on a systematic basis or you have companies you believe in the long term for the future then take those opportunities to buy at levels that you consider to be cheap in your mind or good value. I wouldn’t say retail investors need to have cash. But there is a lot of speculation as is usual in good markets. Try and keep away from that noise and stick to your normal investments.

Q.4. You said there are challenges for the Indian bourses. Where do you see the pockets of opportunities and which sectors are likely to do well and which ones are to be avoided?

I think the whole hospitality sector will do exceptionally well. They will have some pricing power coming back to them. We all want to get out. While we would be too scared to go overseas in case we get stuck there because of the threat that the virus poses, I think that will be one of the themes that will play out.

Also, within the financial sector, there is a lot of change going on. In the private banks, there have been a lot of changes in the top management. We are still working out which ones are going to be the winners. In the financials, I would be looking more towards the insurance companies.

We are all going to need more health insurance and so forth and also the asset management companies because I don’t think this move by investors towards the market is going to go away. Younger people are willing to take a little more risk to save for the future and put some of their money into the stock market. So, I think AMCs will do very well over the next two to three years.

Consumer discretionary will also do well as we all are not going to travel as much. We are surely going to spend that money somewhere, be it luxury goods or otherwise.

In the real estate sector, I would look at the materials side. The likes of L&T will capture the increase in government spending which has a multiplier effect. If that kicks off and you have the private capex picked up by Indian companies alongside foreign companies coming into India to enjoy some of the growth compared to other places of the world, I think it will make not just for GDP growth but for earnings growth going forward.

One of the sectors that I would look for in the longer term is the telecom sector. I think digitisation and the demand for 5G going forward will play out for the telecom companies in the next 2-3 years. The areas where we will be a little bit more cautious in the shorter term probably would be the commodities sector.

Q.5. There has been a huge rise in Demat accounts in the past months. How are you seeing the financialisation of savings evolving and spreading to the smaller cities?

It is happening. From the figures I have seen from the BSE and NSE, there’s a lot of additional interest in the stock market. I hope it’s not going to be speculation. That worries me. But from what I can see it’s more of a good investment. The likes of SEBI, BSE and NSE through their education programmes are trying to educate people about the long-term aspects of savings rather than just speculating.