While the markets have run up recently, we do not believe it to be an irrational exuberance bubble, said Andrew Holland, chief executive officer, Avendus Capital Public Markets Alternate Strategies LLP in an interview with Business Standard.
He noted that the benchmark Nifty50 is up just short of 8 percent and underperforming in contrast to other markets like South Korea and Taiwan. However, he added that “We have been more surprised with the rise in global markets, notwithstanding all central banks actively stating that interest rates are likely to continue to increase, thereby dashing hopes of rate cuts by the US Federal Reserve (Fed) by the end of the year.”
In the long-term view, he believes that the emerging markets (EMs) will perform well once the US Federal Reserve adopts a dovish stance on interest-rate hikes. Although India may lag behind the ‘exporting’ countries in the short term, a catch-up is expected in the second half of the year, he stated. Foreign investment flows may have also been more skewed towards India recently due to the economic slowdown in China and geopolitical problems with the US, added Holland.
Going ahead, Holland said that earnings will be the catalyst for markets to march higher from here on out.
"Given the multiplier effect of government and private capex on the economy, we are confident that upgrades in earnings will be forthcoming in the second half of the year, further enhanced by lower commodity prices," stated the expert.
Any downside risk is likely to arise from global factors and/or from a more accelerated economic slowdown in developed countries as interest rates may finally begin to impact spending, he warned. This will likely lead to pressure on prices of commodities and stocks related to the commodity cycle may be vulnerable to downside risks, predicted Holland.
Overall, he remains constructive on the market, as earnings growth is likely to accelerate further over the years, and valuations, albeit stretched in the short term, will begin to look more reasonable.