“2023 is going to be a volatile year for the markets with risk-reward to the downside. It is going to be a great year to deploy capital and build portfolios for returns next year,” Naveen Chandramohan, Founder and Fund Manager of ITUS Capital says in an interview with Moneycontrol.
On the Fed, Naveen with more than 16 years of experience in the financial markets believes the Fed will not loosen the policy immediately. “I think we are left with 1-2 more rate hikes,” he says.
He feels the difficult balancing act the RBI has to play is, the credit conditions are already tight in the country. “The RBI has to balance rate hikes along with liquidity in the banking system to manage the monetary and fiscal conditions simultaneously. This is where the capex spending from the government needs to come in – if there are delays on this side, we could be hurt in the short term,” Naveen says.
Going into Q3FY23, the sentiment in India was extremely positive. In the last five months, there has been a change in sentiment globally. What changed?
In the last conversation we had, I had spoken about the market price being a function of three things – liquidity, growth and valuations. We had discussed why only one among the three was positive, which made me cautious about deploying capital. I believe the sentiment you are seeing today reflects the same. Liquidity has been tight and valuations had little room for margin of safety, and I expected valuations to correct to reflect the same.
Do you think this is a function of inflation expectations from the Fed?
Absolutely, liquidity conditions on the monetary side reflect how policy rates are set. The market had priced in a rate cut in the second half of CYF23. However, I continue to maintain that inflation is structural and I do not see the Fed cutting rates unless the sentiment in the market drastically changes to the downside. Going into the beginning of the year, with valuations where we were, I believe the expectations for a Fed rate cut were misplaced.
With the indication of continuity in aggressive policy tightening by US Fed, do you see the possibility of Global Financial Crisis 2.0 in next financial year?
No, not at all. The conditions today are not reflective of a financial crisis but that of a reset. The Fed is tightening rates today because job growth continues to be robust. People who dropped out of the labour force over the last two years (due to easy money given to them) are coming back into the economy.
With manufacturing being de-centraliszed across locations, countries across the world are spending on capex. These are good things and inflationary in the long term.
Why do we need a reset? Because easy money over the last two years led to poor decision-making across companies and balance sheets. That needs a reset – I do not believe that's an onset of a financial crisis but a change in sentiment. This is what will result in a great buying opportunity.
What is the possibility of the market hitting June 2022 lows again in next financial year?
Predicting prices is going down a fool's path – so I would be honest and say that it's not worth spending time on the exact price of an index or the market. However, the June market level is 10 percent lower from here, I would think that it’s a non-trivial probability for the market getting there.
If the above situation occurs, then which are the sectors to focus on for investment?
In our previous conversations, I have spoken to you about B2B manufacturing, auto ancillaries and capex-related beneficiaries being themes we are invested in and like. Nothing changes in this regard.
Given the expected aggressive policy tightening by Fed, do you think the decision of change in policy stance by RBI may also get delayed?
In order to be slightly more nuanced, I believe Fed will not loosen the policy immediately. I think we are left with 1-2 more rate hikes.
In a globalised world, I would expect RBI to raise rates too. The difficult balancing act the RBI has to play is, the credit conditions are already tight in the country. The RBI has to balance rate hikes along with liquidity in the banking system to manage the monetary and fiscal conditions simultaneously. This is where the capex spending from the government needs to come in – if there are delays on this side, we could be hurt in the short term.
Do you think the inflation will remain higher and stickier in next financial year?
I think we will normalise at these levels. I do not believe we go significantly higher from here. The reason for inflation to be sticky is due to global capex in the system, which will be funded by the government balance sheets globally (this time).
What is your take on the likely journey of equity markets in the next financial year?
I have continued to maintain that 2023 is going to be a volatile year for the markets with risk-reward to the downside. It is going to be a great year to deploy capital and build portfolios for returns next year.
Do you see SVB Bank collapse likely impacting the broader markets?
I have maintained that liquidity is always correlated. I know many funds have mentioned that their portfolio companies are fine and are fundamentally sound, but markets do not function as a standalone. The bank liquidation has significant ramifications for the broader markets, liquidity and additional funding.
When the flow of capital is curtailed, it results in a loss of confidence. The first thing that happens in such an environment is a pull-back of risk assets. I expect this to be no different. I think this can result in systemic downside if the Fed or the regulators do not step in.
However, I do not see them acting immediately which is where I believe the downside could be protracted. I believe this will create a great opportunity to deploy capital in risk assets, but again this is going to test the investor's gumption. This is why I continue to maintain that 2023 is going to be a great year to construct risk portfolios and deploy capital.
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