The major event the market has been waiting for – the Fed meeting as well as the dot plot – has passed and global markets are nowhere in the mood to rally. What is your view of the market recovery? What kind of movement do you expect for the Indian market?
I have been cautious for some time. Basically, there is a big shift in the global macro in terms of very heightened volatility. Second, the kind of tightening that is happening, the rate hikes, are unprecedented. We haven’t seen this kind of rate hike in 40 years. We will have to endure this period.
There will be these episodes of markets going up and down sharply, but overall I would say the markets will have a hard time going up from here. Indian markets, thanks to a good economy, should outperform their global peers, but the risk is when everything is on sale and we have an open door policy in India where you can take a lot out.
FIIs are invested in top quality players and can withdraw Rs 2,000-3,000 crore daily and with the advent of retail streams we have seen that the door has become even wider. So we will continue to see pain coming to the Indian market, not because of any intrinsic reason for our markets, but because we are tied to the global game.
I would still say cautious as the RBI will likely rise 50 basis points. They might want to do a 35bp hike just to act differently, but from South Africa 75, to Sweden 100, to Vietnam 100, to Switzerland 75 – the last negative rate bond left last week with the Swiss National Bank raising rates by 75 basis points and going to zero. About 90 central banks have raised rates this year. Of this number, on more than 47 occasions, increases of more than 75 basis points were made. To protect the Rupee, RBI’s hands will be tied for a 50bps hike, but let’s see, maybe they will do a 35bps rate hike.
What does an investor do in this kind of volatile situation? What is the best way to find your way around as there is a lot of stuff available for sale. But even in the stock market, in recent days, we have seen the opportunity to buy more things?
Yes definitely. In any market there will be a lot of stuff on sale and even though Bank Nifty is hit a lot, my first favorite spot would be the banks. You’ve got a massive kind of multi-decade track here. It’s still a very underbanked, very underpenetrated country and we’re going to get those benefits. Financials therefore remain the first choice. IT is still going to take three to six months before there is some leveling off in margins and issues that exist. Consumption is strong and with the harvest coming, we hope that rural consumption will also take off.
The first harvests have started to reach the mandis and from next week you will start to see an upsurge in rural consumption. Consumer stocks seem well positioned. The market advanced in terms of anticipation, but overall short and sweet for investors. If you don’t need the money for the next year, stay invested because the markets could go down from here.
I think it could also break them if the US breaks even lower. But the good thing is that when the market turns in a few days, it will give the returns for the year. So staying invested is what works for most retail investors. You can’t time it well.
Second, there is the extra money invested in SIPs. So buying the stocks you like in small amounts every week or every month might be a better strategy because we don’t know how long it will last. If there is a recession in the United States, the US yield curve tells you that a recession could be coming. Now, the point to note is that 100% of recessions are preceded by a yield curve inversion, but yield curve inversion does not mean that a recession will occur.
Increasingly, it seems unlikely that the Fed will be able to control inflation without a hard landing. Three things could really happen; First, they drop their 2% goal and go to 3 or 4% and life goes on. Second, there is some political interference that is unlikely in a US-style scenario. We see this in Turkey, but I doubt it will happen. Third, to bring it to 2%, US unemployment must be reduced to 6.7%.
I am an old economist. I mark it on my Phillips curve and that’s what the
The curve tells me, 6.7%. 5.3 million unemployed is the rate at which inflation reaches 2%. It’s math, it’s not my opinion. That’s what the curve tells you. It would be a dark recession and the markets will anticipate it, the markets will bottom about six months before we hit that. They will also start to rise even before we hit the bottom of the business cycle and that is the beauty of markets. We know this in theory; living it in the real world takes a lot of emotional balance and that’s why we say don’t try to time it. Just stay invested and keep investing regularly. It is the best mantra.
You have already told us that your first port of call is banking stocks. If we had to move away from that, what other themes do you pay attention to? Is it consumption, is it Europe plus one, is it the end of year celebrations or even industrialists and defence?
All the themes you mentioned worked well and they have a lot of scope behind them. I would like to share Europe plus one. I have spoken to three friends who are industrialists in Europe over the past two days and each of them was saying there is so much pain, it is very difficult to really run the business and they were looking to introduce manufacturers in India to shake that up.
The second very interesting analysis that I read is that the cost of wood has increased by almost 87% because of the winters. Whole neighborhoods store wood in case the gas leaks because even at 100% gas storage there is only enough gas for 80 days in Europe. So if they have a four to five month winter, you don’t have enough gas because new supplies from Russia have stopped. So the Norwegians get involved, Spain sends some but it will require a lot of management.
So Europe plus one is very strong, it could help our car industry, chemicals, specialty chemicals and consumption too. Now that the gist of it is where consumer confidence figures stand in Europe, will we see a blockbuster Christmas or will it be indifferent consumption? When it comes to consumer exports, I would be a bit suspicious, but India will substitute things like machinery, automotive, chemicals and in the short term we have great opportunities. Europe plus one is a big topic that we should look at very closely.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
