“One cannot rule out market volatility as the significant increases in interest rates will have some dislocations in some parts of the global economy and that could have its potential impact on risk assets,” Chirag Mehta, CIO of Quantum AMC says in an interview with Moneycontrol.
He feels there could be pressure in foreign flows as investors might prefer other emerging markets that have seen a material correction and look attractive from a valuation standpoint. Higher yields in debt could also negatively impact foreign flows into equity markets, he says.
Mehta with more than 19 years of experience in the financial markets says the RBI might hike the repo rate by another 25-50 basis points. “Though in our opinion that would be overtightening and will likely reverse soon.”
He sees a strong case for the RBI to change its monetary policy stance to ‘neutral’.
Do you think capital goods and domestic consumer goods are looking attractive now?
The government's capex push and a potential revival in private capex are likely to support the capital goods sector in the medium term. Competitive intensity in domestic consumer good space is likely to be high in the near term which could result in margin pressures offsetting the advantage due to a lower inflationary trajectory to a large extent.
Do you still expect banking stocks to outperform every other sector in coming quarters?
In the near-term banks can witness some moderation in credit growth and NIMs (net interest margins) as a benefit of faster repricing of advances over liability mainly in the numbers. But over the medium term, banks remain well capitalised with benign asset quality to participate in the economic upcycle that India will witness going forward.
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Valuation in the space is also quite reasonable with potential credit growth likely to remain buoyant. We remain overweight on banking space, especially the private banks.
Do you think the equity market correction is over now or do you still see a possibility of some more points of downfall in coming months? Also, what are the risk factors for the market?
Market valuations hover around the long-term average. Though recent corporate results indicate a mixed picture of domestic consumption, there are early signs of rural recovery. Buoyant tax collections, credit demand, government capex and a potential revival in private capex augur well for the cyclical economic uptick.
The global slowdown would translate to moderation of commodity-linked input prices in many sectors. Potential economic recovery, input cost moderation and reasonable valuations could prevent a material correction in markets.
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However, one cannot rule out volatility as the significant increases in interest rates will have some dislocations in some parts of the global economy and that could have a potential impact on risk assets, Also, export-oriented companies with a concentrated client profile could see higher pressures from weak export markets.
There could be pressure in foreign flows as investors might prefer other emerging markets, which have seen a material correction and thereby look attractive from a valuation standpoint. Higher yields in debt could also negatively impact foreign flows into equity markets.
Which is the one sector that you are super bullish on, now?
We are positive about autos, especially the two-wheeler segment. The trend in auto sales has closely followed the economic growth rates over the long term. Unlike the past 2-3 years, moderation in input cost would offer scope for low price hikes in two-wheeler prices.
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The impact of an economic revival could be more pronounced in the two-wheeler segment due to improving affordability among the relatively less affluent customer segment.
Do you expect more weakness in corporate earnings in coming quarters?
Corporate earnings for the last couple of quarters were on expected lines pressured by higher input costs that now seem to be waning, while there may be some slowdown in the economy in the near term, normalisation in input prices and a potential rural recovery will likely support corporate earnings in the medium term.
A strong bank balance sheet and a de-leveraged corporate balance sheet could also support a capex-driven growth cycle. India seems to be in a different earnings trajectory compared to the globe. Though export-oriented companies could see some pressure, we are positive about the overall corporate earnings trajectory over the medium term.
Do you think the core inflation to remain sticky for coming months?
In India, the core inflation was not driven by excessive demand. It was mainly caused by supply chain disruptions and a sharp jump in commodity prices.
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Now, prices of most industrial commodities have come down from their peak and are stabilising. Supply chains are also getting back on track with the broadening of economic activity and China re-opening. Thus, we don’t see incremental inflationary pressures from the supply side.
On the demand side also things are slowing down. Private consumption is still below the pre-Covid growth trend and recovering at a sluggish pace. The pricing power of most consumer-facing companies is weak and unlikely to improve in any material way due to slowing GDP growth.
All in all, evidence supports the decline in core inflation going forward. Sequential momentum across many goods and services has already been falling for the last 3-4 months. We expect core CPI to fall from the current above 6 percent inflation to around 5 percent in FY24.
Will the RBI continue with its current policy stance for rest of calendar year, though many experts are expecting to change in stance to neutral in next couple of meetings?
The RBI might hike the repo rate by another 25-50 basis points. Though in our opinion that would be overtightening and will likely reverse soon.
With respect to the monetary policy stance of “withdrawal of accommodation”, the RBI compared the current real repo rate and liquidity conditions to that of February 2019 when they had started cutting interest rates. Now, the repo rate is back to the level where it was before February 2019. The real repo rate is also in positive territory – around 90 basis points based on an average inflation estimate of 5.3 percent.
So, the monetary policy stance is now anchored on the liquidity condition. Durable liquidity is still in surplus of around Rs 1.6 lakh crore, but it is coming down sharply. By April-end, liquidity conditions will turn into a deficit on a durable basis. This would take away the entire monetary accommodation provided during 2019-2020. Thus, there is a strong case for the RBI to change its monetary policy stance to ‘neutral’.
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