Go for quality in consumption stocks: Andrew Holland, Avendus Capital

The auto sector corrected in the past year and that is why we see value and prices rebounding in some cases

The best way to look at consumption is to have a broader basket of the best stocks in each of the sectors and that is what people have been doing. That is why the multiples of a lot of these companies are very high, says Andrew Holland, CEO, Avendus Capital. Excerpts from an interview with ETNOW.

GDP growth rate is sub-5% but the markets are just a couple of hundred odd points away from record highs. What do you think is happening right now for the equity markets? Why this divergence between macros and the equities?
I do not think we are alone in this kind of dichotomy. Globally, you are seeing very low GDP growth but markets are hitting new highs. This is obviously a flight to quality in terms of the companies you want to own now, not just here but globally as well. The one surprise last week was obviously the RBI and their kind of pause. I could only hope that they are saving some for a rainy day because bringing the growth forecast down from 6.9% to 5% in a quarter or so, is frightening in itself. Maybe they are keeping the powder dry for a bigger rate cut in February to help with the Budget as that comes through.

But I do feel that we are seeing some kind of pickup in the auto sector. December is usually a pretty good month and that would play out well for optimism as well. But between now and February, when we have the Budget in India plus globally you may get a tailwind if see the China-US tariff deal come through before the 15th of December. This is an important week in terms of the Fed and obviously the UK election. A little bit of volatility maybe around that, but all of this means lower rates for a longer time and if there is a trade or tariff deal that comes through, then expectations of global growth will start to accelerate as well.

Maybe RBI is keeping the powder dry for a bigger rate cut in February to help with the Budget as that comes through.
-Andrew Holland

Are you surprised with last week’s RBI decision to hold rates or do you think it was the right decision because a lot of economists said that you are seeing inflation inch up and maybe holding rates was the right decision?
I am actually scratching my head wondering why they did that. The economy needs whatever it can. Yes, you can say, transmission needs to be there but what it tells me is that monetary policy in the past has been far too tight for too long because expectations from the RBI was 7% GDP growth and now they are forecasting 5%. So they have been behind the curve and I think they still are behind the curve in terms of what they are doing.

But as I said, maybe it is because they are holding back for a rainy day or there is something that they want to support the government with going forward. One of the things that they could do and hopefully this would come through is to help with the last mile borrowing of the real estate companies. I think that would help with a lot with liquidity and now we are hearing that the government has got some money behind its fund to help with this too. So, maybe a combination would be a very good move by the RBI, if they allow banks to do that.

How would you read into the consumption space right now?
There is quite a lot of divergence in view. I think the best way to look at consumption is to have a broader basket of the best stocks in each of the sectors and that is what people have been doing. That is why you are seeing that the multiples of a lot of these companies are very high. The auto sector did correct quite significantly in the past one year and that is where you saw the value and some of these prices rebound. That will continue to happen. But it is a longer-term story here.

It is very easy to say consumption is falling across the broad. It is not so. I was at a conference last week and I was listening to Hindustan Unilever and of course they are going to take over GSK in the next quarter. They have a different type of trajectory now in terms of what can happen for that company. You have to look at each company and what the prospects are rather than just tarring everyone with the same brush. That is what I would say, stick to the quality in each of the sectors. You can look down a little bit later, once the economy or consumption starts to pick up. But at this time, I would just keep to that.