Andrew Holland, CEO of Avendus Capital Alternate Strategies, tells
Malini Bhupta, that the thrust towards defence spending a
Russia’s war against Ukraine may end sometime soon, but the geopolitical landscape could change forever. India’s Atmanirbhar policy could well become the world’s credo as countries look to cut dependence on other countries to protect their supply chains. Andrew Holland, CEO of Avendus Capital Alternate Strategies, tells
Malini Bhupta, that the thrust towards defence spending and renewable energy will be accelerated. Excerpts:
What do you make of the geopolitical situation and what will its long-term impact be?
I think we all hoped Putin would not take the steps he did and it’s not as if Europe didn’t know about it, but they were hoping he would not take this step. There is still hope that everyone will come to the table to have a ceasefire. That will be the best case scenario and would be a big relief for the markets and industry, if that was the outcome in the short-term. Thereafter, the geopolitical world is going to change because a few things have been happening. For example, is globalisation dead? Geopolitically countries will say they need to be increasingly more self dependant. For starters, countries will ask if they need to have their reserves in dollars? If there is a move away from the dollar then we could see dollar weakness going forward. From an ESG perspective, companies will look at supply-side dependencies and look for ways to reduce it and that will lead to investments. The supply chain problems we have been facing since Covid, will mean that companies will look at lowering dependencies. I am sure every company will look at their exposure to Taiwan. This will lead to higher capital expenditure by companies in their own country to secure products/services. The thrust towards defence spending and renewable energy will be accelerated.
A select set of companies have driven indices in the last decade or so. Do you see a new set of companies emerging from this?
The banking industry has to be sizeable to support a $5 trillion economy. But within that the whole change in digital financing is putting pressure on banks. Within financials you want to ask whether you want to be in the digital space or banking. If you look at Bajaj Finance, it has 100 million customers and as it rolls out financial services it can sell to these customers because its cost of acquisition is low. Within financials you have AMCs and insurance companies that will also do well. May be it won’t be banking that will lead the indices. In fact, it could well be a whole new set of sectors especially those which may benefit from a new capex cycle.
Foreign portfolio investors have been selling Indian shares since October. What is actually driving this selloff?
Typically when you expect interest rates to rise, you sell risk — which is usually emerging market equities, commodities and EM currencies. This risk-off trade has been exacerbated by what has happened in Ukraine and higher oil prices. In addition, there is a hit from currency depreciation too. But India did very well last year. So when redemptions happen, investors look at China, which has fallen a lot and don’t want to sell more there, so you take some money out of India. If you are in ETF, you have to go by weightages. All of this said I am certain FPIs will come back to India.
So there’s nothing fundamental about their withdrawal from India?
Prior to this, our thinking was that interest rates would go up in the US by 50 basis points and the world would go towards slowdown/recession. Two things have worried me. First, central bank tightening. And second, Fed’s balance-sheet reduction by $1-2 trillion from $9 trillion. Now if you look at what happened when China tightened, the unintended consequence of that was problems in the property market. Now with all this liquidity being sucked out in Europe and the US, will there be no unintended consequences of that? There’s always something hidden under the carpet that would raise concerns for markets.
Do you think that unwinding by central banks will actually happen or they will find ways and means to keep liquidity taps on?
We don’t know the unintended consequences of this unwinding. We have not seen any tightening yet. Even though they have been throwing money at it, growth has not revived. As far as inflation is concerned they will fight it best they can. If interest rates are going up, if energy costs and mortgage costs are going up, spending will come down. Demand destruction will happen till commodity costs come down.
Are we looking at a global recession?
It’s a real possibility. Europe is definitely heading towards recession. It is already in a stagflation and worse is recession. With interest rates going up, food prices going up and energy costs rising, there is all around demand destruction. The thing I look at is 2 and 10 year bond yields in the US. At the moment the spread is 30 basis points and for the UK it is 20 bps. Before this crisis it was 7 basis points, which means it was close to recession. The last time bond yields in the US inverted was in 2019.
What are the risks to India’s growth?
The near-term risk to India is higher commodity prices. It will hurt our GDP growth and the dovish tone of RBI will have to change to be more hawkish.
How do you see India coping with all the darts flying around?
I actually feel quite optimistic about India because we are a domestic demand driven economy. We’ve never been big beneficiaries of globalisation and exports, barring certain industries. But I look at 450 million Millennials and Gen Z in India, this is where the growth is going to be. If we can continue to get jobs growth, along with capex then it will have a multiplier effect.
What about China plus 1 strategy will accelerate?
Perhaps it may remain for a while, but given above views of supply side security we think capex and domestic demand will be the key drivers for the India economy going ahead. Undoubtedly, FDI in India will rise given the likely high GDP growth rates compared to the rest of the world.