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Q1 likely to be more challenging; IT could be a place to hide: Andrew Holland

“We think that the inflation base is transitory and it will come back to lower levels and the Fed will probably make that policy mistake along the way. That might challenge the markets in the first quarter as we get towards the end of the tapering by the end of March and start thinking about what next,” says Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies LLP.

While it has been a very prosperous 2021, do you think that kind of performance is going to be difficult to replicate in the year ahead?
It is going to be challenging. I am not saying that because they will grow in line with earnings and in terms of the market levels would get 10-15%. That is the kind of expectation we have over the course of the year. It would not be a bad outcome at all but there are challenges.

While we have started the year on a very optimistic note, we know that there are going to be question marks around the Fed policy of tightening and interest rate hikes. We think that the inflation base is transitory and it will come back to lower levels and the Fed will probably make that policy mistake along the way. That might challenge the markets in the first quarter as we get towards the end of the tapering by the end of March and start thinking about what next.

So, maybe the first quarter is going to be more challenging. But overall, if you take a view that maybe the Fed has been optimistic on its 4% growth forecast of the GDP and it stays less than that, then interest rates might not rise at all and therefore money is going to come back to emerging markets. Now how quickly that plays out is the difficult part because obviously the Fed has officially said that this is what they want to do. So, it may take a bit of time before they can move away from those statements that they have already made and of course, if this is done quickly, I would think markets will start to discount its inability to manage the economy going forward.

What happens to IT because as a sector, it had pretty much a secular move all throughout 2021 while others like pharma, select autos or for that matter metals started off the year really well and then petered down in the latter part. Has IT run its course or is there a case for selective re-ratings going forward?
The tailwinds behind the sector will continue to play out in 2022 and if what I said is correct, in the first quarter it could be a little bit more volatile for markets and IT is a place to hide, So, there are two good parts for IT, where one has the tailwinds of growth and therefore it is going to deliver on earnings but also that the defensive nature behind the sector will continue to draw investors at least in the first quarter. We could see more outperformance in a very short term. It is a story which I do not think is going away with all the changes in technology and digitisation globally. One sector which I think will probably have to rerate because of this is the telecom sector. That is probably where investors will look next, after IT.

The market today is showing leadership signs in the banking space. While the Bank Nifty has been an underperformer for 2021, PSU banks like State Bank of India, Union Bank, Bank of Baroda got rerated. Only large private sector banks like HDFC Bank, Axis Bank were under pressure. Could the tide turn in favour of the large private sector banks again?
It will but I still think the jury is out on the pecking order within the private banking sector given the changes in top management. So, while we have always worked on the basis of the top pecking order for years, that has changed and the market is trying to grapple with that as well. Also, how the technology shifts and disruptions that are happening outside the banking industry will impact is worrying investors in the short term.

There are still some problematic loans which still seem to be cropping up. I am not so sure that the banking sector as a whole will continue this initial run today because interest rate hikes will have an impact on them as well, particularly in terms of bond holdings.

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