In an interview with Moneycontrol, Abhishek Banerjee, the founder and chief executive officer of Lotusdew, points out that the urban consumption basket is experiencing elevated inflation rates in education and healthcare, both of which comprise a significant portion of discretionary expenditures in urban regions. Hence he feels that sectors like apparel, mobility, etc., appear expensive.
With over a decade of experience in asset allocation, portfolio construction and quantitative investments, this chartered alternative investment analyst is quite bullish about the ferrous metals space purely due to the expected demand from construction and manufacturing.
Q: What could be the key reasons if there is any rate hike by the Fed in the near future, though now most experts ruled out the same?
Increasing rates increases the cost of new issuances thus impacting the US deficit. The FED has a dual mandate of price stability and full employment. Given employment has shown a stronger-than-expected number, the weight still lies squarely on providing price stability or checking inflation.
The playbook on the monetary side is really only just to increase rates. But given the very high yields, we cannot rule out there will be adjustments on the fiscal side where taxes or tariffs can be tweaked to tame inflation.
Primarily strong hiring numbers, low unemployment and stability in energy prices could propel the next rate hike.
Q: Do you expect more strength in the US dollar index and US 10-year treasury yields in short term?
The world is rushing in to lock in yields above 4 percent for the first time in more than 15 years in USD. This perhaps explains the strength in USD where investors are piling in their investments by converting their local currency and buying dollars.
However, many early movers are currently seeing capital losses on their bond portfolio due to higher yields subsequently. In my opinion, the US yields are at their peak barring any other moves on the fiscal side like tariff wars.
Q: Do you see any possibility of a financial incident in the US in the rest of the current financial year?
Yes, the smaller regional banks that hold the US treasury in their capital adequacy books will not be able to lend due to a drop in the value of these bonds. The most benign outcome is a lack of capital for borrowing - but a more serious could be that they need to be rescued by the Fed.
Q: Are the valuations in consumption space still high?
Consumption can be split among urban and rural - and as well as staples and discretionary. In this matrix rural discretionary seems to be more expensive. This is primarily due to weaker-than-expected crop yields which drives rural discretionary spending. Also as rural economies formalise, it will likely leave less room for discretionary spending as capital will get used in formal structures.
Also read: RBI might go for rate cut in FY25, even if Fed doesn't, says this investment strategist
However, elections are coming up and it has been historically observed that rural spending spikes during election times. Hence, we need to watch out for changes in spending sentiment as time progresses.
Urban consumption basket is experiencing higher inflation in education and healthcare which constitutes a large portion of discretionary spending in urban areas. Hence, sectors like apparel, mobility etc., seem expensive as well.
Q: Is it the time to be cautious on the broader markets space and move to largecap space?
We think smaller companies that are micro monopolies offer a better chance of capital appreciation compared to larger companies in the longer term. As most largecap have export-driven revenue - as Indian government bonds get included in the JP Morgan this is likely to bring in an additional $150 billion in Indian government bonds which will cause INR to appreciate barring intervention by RBI. If the rupee hardens more than expected - exporting largecaps might be negatively impacted.
Q: What are the key factors to watch out and key sectors to focus on in the corporate earnings season starting next week?
As the earnings will be coming off from a distorted covid-19 base, we need to seasonally adjust it and compare it to pre-covid levels. Hence, there could be some mispricing if this is not fully taken into account by all market participants - hence we should expect more volatility as prices settle down.
Also, given US regional banks are at risk, we need to watch out for actual cash flows versus accrual accounting of IT services firms.
Q: Any thoughts on ferrous metals space...
In India, mining of coal, metals, and minerals is still a PSU-led industry. We are quite bullish about this space purely due to the expected demand from construction and manufacturing. However, we also have been constructive on precious metals as a strategic allocation to adjust overall portfolio risk.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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