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    We don't buy into RBI's Goldilocks economy thesis: Andrew Holland, CEO, Avendus Capital Alternate Strategies

    Synopsis

    PSU banks are a tough nut to crack, says Andrew Holland.

    Andrew-Holland

    "I would say we do not see any respite for PSU banks as a whole."

    PSU banks are a tough nut to crack, given the kind of uncertainties that are dogging them, says Andrew Holland, CEO, Avendus Capital Alternate Strategies. He sees 67 as the likely near-term target for the rupee in a scenario of pricey oil. He spoke to ET Now.

    Edited excerpts:

    The last time we spoke, we were amid an extremely volatile market and things have not really changed much ever since. In fact, it has only increased with the kind of rally we saw in crude oil prices and commodities across the board. Does your view still remain the same or would you think that volatility will continue for some more time?

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    No, it will continue for some time, particularly in the next few months. We have got obviously the elections here in Karnataka. From a local standpoint, expectations are high about the BJP... and how that might affect the general elections is one point.

    The second point is the whole scenario that the RBI gave out in the credit policy. That's the Goldilocks type scenario for the economy, which something we were not buying into. Unfortunately, we did not because when you see the minutes, it is kind of completely opposite of what came out of the RBI that day and so you have seen the reaction today on that.

    Third and probably more importantly, we have been dragged up along with global markets. I think global markets themselves are going to struggle a bit going forward, I mean, from the kind of worries about trade wars. Yes, that has gone away and if that continues, obviously global growth will continue as we see it.

    The question is whether it means there is pressure on interest rates. The worrying fact is your 2-year and 10-year are very close in terms of yields and if you get an inverted yield, that usually leads to recession. I think these are things that are going to worry markets in the next month or so and it is going to remain very volatile.

    The earnings season in the US has been quite good, but is not really reflected through in terms of share prices. I think the best is probably over for global markets and I think we have our own problems here. I think the oil price looks as though it could kind of move towards $80, which will obviously put pressure on fiscal deficit and probably move the rupee to around the 67 level.

    This Friday, you are seeing our markets come under pressure. There are a lot of factors as highlighted by you, but I want to get a sense from you. Would you completely stay away from all the stocks that have so much bad news revolving around them, whether it is the Punjab National Bank fraud case and all the associated banks, Nirav Modi and Fortis Healthcare. Would you say it is best to stay away from them or do you guys look at maybe dips as opportunities to buy for a turnaround story?

    I would say we do not see any respite for PSU banks as a whole. I mean nothing has changed for them. If anything, they are probably just spending more time on going through their own books rather than going out there trying to do the normal business of borrowing and lending. In that case, you know private banks and NBFCs will continue to take market share. Yes, they will be helped by the fact that they will have to mark to mark the bond losses, which they probably all have and can do it over four quarters. But you know there is no real reason to get excited because they still need to be recapitalised and I do not think the problems are yet out of the system for the banks. We saw that a little bit with IndusInd Bank’s results yesterday.

    In that respect, there is no value to be found yet in PSU banks because you do not know what has been and what could come out and kind of hurt you. As regards... Fortis, there seems to be a lot of interest in terms of the bidding and I am sure the board will do the right thing. But again, you are playing on what you think would be the right price and I have no idea what the right price is... I think you buy the sectors which are going to be strong and just keep with them. That is what has been working for the last two months as well in terms of the strong sector. So, markets went up actually in January very very hard and a lot of sectors and stocks that were not necessarily kind of doing well benefited from that. And now, we are seeing the big falls in those stocks.

    Now, the US is talking about hiking interest rates because they fear about overheating of economy. Inflation is a secondary concern, but here in India we are not concerned about growth rate, we want more, but the concern is inflation. Statistical correlation says that with higher interest rates, markets have given positive returns. Statistical correlation of course is not fundamental, but do you think that a high interest rate environment would have potential to derail this growth? Also, the banking sector which is under severe pressure be it corporate governance or NPAs would again have one more concern to deal with and that would be a credit offtake if interest rates move higher.

    Anyway interest rates have moved higher, I mean the RBI did their best recently to kind of put some cold water on that, but it has backfired on them. I do not really see interest rates going up so significantly in India. That is not the concern. Also, the RBI has said anyway that the banks can kind of take these losses over four quarters. It is not as though it is going to be a big hit. In that respect, it is not a market-moving event and the banks are going to get worse from here. I think that is pretty well known.

    The problem will be that if global markets again have a lot more volatility around higher interest rates and markets fall, there is nothing in India really to hold us from that fall, given the problems which we just outlined. And I think the other factor is that with oil prices where they are and if they do go higher, that would lead to obvious concerns about government borrowing being higher than originally thought. Also, interest rates might inch a little bit higher in the short term to compensate for that.

    If I am correct in that scenario, obviously the rupee will come under pressure as well. Which is why we are thinking that 67 is a likely near term target for the rupee.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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