For generic pharma firms, it is going to get worse: Andrew Holland, Avendus Capital
We are seeing a very strong rally in the pharma names. This is the second or third day on the trot. Do you believe that the worst for pharma is behind us and are investors once again ready to come back to the sector?Are looking at some kind of growth in the near to medium term?
We are just going through that phase of optimism about the pharma sector. It was started off by Sun Pharma after they got some clearances for their manufacturing plant. We saw this previously in sectors which eventually succumb to the kind of capacity pressures. So, we had it in telecom, in IT and we are just starting with pharma.
I expect that you are going to have these upward moves of days or weeks when things are looking okay but for a lot of the generic pharma companies, the pressure is not going away and it is going to get even worse as a year passes.
The actual change that we are expecting is going to be quite painful. Those days of generic profits are gone. It is not coming back and so we will have to change that strategy. I am afraid fundamentally nothing has really changed.
In May we saw the highest outflow of FIIs. Do you think that trend is going to continue? There has been recovery in the US. The rates are likely to go up in the US but the RBI governor of seems to have responded with a rate hike?
I do not think this is the end of rate hikes in India. You will have a number of events now. Obviously political risk will be higher on the agenda for all of us over the next one year and that will keep markets volatile at best.
The other concern obviously is what is happening in other emerging markets such as Brazil and Argentina and South Africa. This has a catalyst effect in India in terms of the thinking around the rupee and that has obviously kind of scared investors away. But where valuations are concerned, at the moment for Indian markets there is no big catalyst unless global markets continue to move higher.
We are seeing that in the performance. Over the last two to three months, we have underperformed most markets. We had the worst performing currency and that is what has pushed the FIIs away. I do not think they will come back in a hurry, that is for sure. If anything, we will probably continue to see outflows not just from equities but certainly from bonds where the weakness in the rupee and hardening bond yields is really going to have investors take the money off the table.
Since you mentioned about bond yield and of course there is a fear of dollar strengthening further, there are lots of global events coming up. The Kim-Trump meet which everybody is going to keep a very close watch on, the G7 Summit which did not really go down well with the investors. There is also the Fed meet and a rate hike is expected by most people on the street. Are things likely to get further difficult for Indian equity markets in terms of attracting foreign investors?
Yes, I think so. In terms of the Fed rate increase, everyone is going for 25 bps increase but what if it is higher? The jobs data in the US and the economic growth suggest that they could actually go a little higher because inflation is picking up there too. I would not be surprised if you would like to see that but the markets are not expecting that at all.
We have all kind of forgotten what short term interest rates can do to people spending in the economy and we are a bit complacent about that. This has partly to do with the bond yields in US being a safe haven against emerging markets. We saw that a few weeks ago and then they gradually crept up again, The global scenario is a little bit murky at the moment.
On one side, global equity markets are doing well but your credit market is a lot more volatile along with currencies. It has been currencies and bonds turn. It may be equities turn next in the next few months as well.
What did you make of the earnings season? The consumer sector seems to have done well and has been the favourite of the markets as well and has been rewarded for the kind of earnings it has provided. If you were to take a cue from the earning season and juxtapose it at all the macros you are talking about, what are you betting on long short?
The macro in India looks pretty poor at the moment. Fortunately, the micro looks better. We have been expecting earnings growth of around 15% growth for FY18. Markets are finally coming down towards that figure. We are quite comfortable with that but there is going to be certain sectors such as FMCG, IT, selective auto which have been delivering this growth, There are also going to be big laggards such as PSU banks, oil and marketing companies, which are going to drag the earnings going forward.
The sectors that we have been investing in is boringly the same private banks, FMCG, IT and autos, We are starting to pick up on the capex theme but it is very early days yet but it is something worth looking at a little bit harder. Thats what we are doing.