4 sectors Andrew Holland is bullish on for near term

"So you might get a few downgrades here and there in a few sectors like IT but otherwise I think the momentum is there. I think also looking at some of the data coming from China whilst it is reopened, it is still looking weak," says Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies LLP.

Do you think this market now needs to be viewed slightly differently because while earnings are okay of late market are only rising high because of liquidity. Frankly, nothing has changed in the last one month with the fact that foreign institutional investors are back. So do you think this is not fundamental but with liquidity which is driving the markets higher?
It is a little bit of both actually because the fundamentals are intact. There is no two ways about that. Yes, valuations remain challenging in some sectors but earnings were okay across the board. I think the expectation now is obviously twofold.

One is will the RBI reduce interest rates by 25 bps in October which means that the market is trying to price that in at some point. And two, will the earnings momentum start to pick up in the backend of this year into 2024, I think the answer to that is yes because I think the government capex and the private capex cycle is really picking up and I think that will be the extra kind of tailwind for earnings to be upgraded in the second half of the year.

So you might get a few downgrades here and there in a few sectors like IT but otherwise I think the momentum is there. I think also looking at some of the data coming from China whilst it is reopened, it is still looking weak.
So I would have thought China would have to kind of throw money at this in terms of easing. But again that might be an opportunity for FIIs and maybe this is what we are seeing to kind of onboard a little bit more India in the short term whilst China kind of goes through its period of consolidation and weakness before it starts to pick up strongly in the second half of the year.

Just the nature and the texture of the rally that one is seeing and it is pretty narrow in nature because it is not like all the Nifty 50 stocks are sitting at an all-time high or peak, much like what is happening with the NASDAQ as well wherein the few of the hands are the ones which are taking the index to a new high. But having said that, where is it that you see opportunity even still and where is it that you would say, be cautious now because these stocks are getting sort of overripe?
Yes, it is an interesting point, but let us just kind of split that out a little bit. In the US, yes it is led by the tech stocks but because the market is expecting an economic downturn there, I think if you look at the small cap indices, I think you will find that they have actually fallen and even banks have done poorly.

So anything, any economic-related sector which is vulnerable has really kind of seen a big fall over the past six months as well. Whereas in India, you mentioned before that the small cap index has hit new highs. So that is telling you that the underlying growth of India is still very strong. So I am a little less worried about the kind of narrowness of what you are saying in terms of the Nifty because I think the broader market is still performing. So I am more worried about the US where it is still six to seven stocks which are really kind of performing and pushing the index higher.

In terms of the broad themes, it has not really changed. I mean, banking is there, defence and renewables along with beverages both alcohol and non-alcohol beverages. And of course, the capex cycle and the electronics is a new area which I think is going to be very big both domestically and for exports going forward. So you know, whilst I think that the Nifty could get towards that 20,000 by say March of next year, and I know you are going to say that is not very much from here, I think some of those underlying themes will play out a lot better for you in terms of making money.

Why is HDFC Bank not participating? I mean, why for that matter Reliance is not participating? These are two heavyweights which in a sense capture the India story, both the length and the breadth. And at a time when FIIs are back, HDFC Bank is underperforming and Reliance is underperforming?
I think for Reliance, there is no fundamental reason apart from that the market is still waiting for the company to come up and talk about its IPO plans or splitting out the businesses. And I think once that comes, then I think that will be the catalyst for the stock.

And I think that is the reason it has not performed. And I think the same with HDFC and HDFC Bank, because of the merger I think everyone is just waiting to see how that will settle down. But I suspect some of the worries around the merger are a little off-key in my book.

So I think until that actually happens, I think the market is just going to sit on the sidelines for a little bit with these stocks until we get the positive news from Reliance about unlocking value of the HDFC in terms of that merger actually happening. And then you can look at the combined group and see what the capability of growing this merged entity and growing it quicker than two separate entities. And I think that is what the market is going to look for. So once you get those two things, I think you will see that these two stocks will start to outperform.

What has been a victorious space per se has been the real estate pack. What is your call on the same because today as well, whether it is Lodha, whether it is Mahindra Lifespace, DLF, they are all rallying?
Our view is very positive on the sector overall because we are taking the view that the RBI will cut rates in October by 25 basis points. So I think if you have got this kind of trend which is going to happen going into 2024 with rates coming lower, then obviously real estate will continue to garner a lot of interest, a lot of investment.

I am not saying the speculative investment, but I am saying that people will continue to buy or want to buy going forward. So I think it is a sector that has probably got a number of years ahead of it where you are going to have very positive moves both in the house prices but also in the share prices. I think once you get to that kind of where land prices and prices themselves become too much of an extension, then that is probably where we would look to be kind of getting less excited. But at the moment we have got at least another two years of runway for this sector to perform very well.