Daily Voice: Fed may adopt more cautious stance on rate cuts starting from Dec meeting, says Ladderup's Raghvendra Nath

Of course, the Indian equity market is very attractive from a long-term perspective. We have a remarkable structural growth story that is building up for the last 20 years and shall continue to become strong over next few decades. In my view, corrections are a part of any stock market, and the October correction has been limited and gradual and was well expected after a fiery rally that we have witnessed over the previous 18 months.

The corporate India shall continue to benefit from a range of favourable factors like – favourable demographics, rising income levels in rural areas, changing consumption patterns, integrating with the world due to rapid technology adoption, a very strong government balance sheet that allows government to front-end infrastructure development, focus on reviving manufacturing through schemes like PLI etc.

Availability of capital, both equity and debt, has never been this good for Corporate India. For the right management and right projects, capital is abundantly available from both domestic as well as foreign sources.

We are seeing a surge of young entrepreneurs in almost every field and every city, who are dreaming very differently from the erstwhile mom-n-pop stores. These trends generally become the bedrock of innovation and subsequently scale which creates fresh levers of growth in the future.

Even the geo-political landscape of the world is favourable to India. Not being engaged in any material conflicts; good relations with every developed nation; posing a serious alternative to the might of China; advantage of language and culture etc. are all going to help in attracting foreign capital in India. As the size of the Economy grows and the new opportunities spring up, the foreign capital flows should also become stronger.

Is it a great chance to reload positions? Which are your bets after recent sharp pullback in October?

The correction that we are now witnessing was a natural outcome of a one-way rally that we have witnessed over the last one and a half years. In any rally, speculation always trumps fundamentals. So, while, the companies’ reported record profits last year, because of the base effect of a covid-affected 2022-23, it was very easy for the market to extrapolate and build high growth expectations in coming year. However, the last two quarter numbers have been a dampener.

In Q2FY25 this far, the revenues have grown at 8.7 percent YoY at an aggregate level (1,023 companies reported numbers), whereas the earnings have actually declined by 2.7 percent YoY.

Even the tensions in the Middle East have been a cause for concern as two very strong nations, Israel and Iran, are at loggerheads and a potential escalation could be devastating for global trade.

In such an environment, focusing on high quality businesses and holding patience is the best approach. I don’t think there is any need to panic as there is enough liquidity and the fundamentals are generally quite strong.

Are you least concerned about FII selling considering the huge domestic pool?

On a standalone basis, the FII selling of almost Rs 1 lakh crore in October looks like a big number. But we have to also factor that the Indian market capitalisation has risen by almost 50 percent during the last couple of years. And the domestic flows are able to match the outflows.

FII flows are a significant determinant of short-term direction of the markets and therefore further selling shall have a negative impact. Even in the case of DIIs, their investment in markets is decided by the retail investments like SIPs which continue to be net positive. There could be some tempering of the surge that we have seen in retail participation if the markets were to correct further.

The liquidity surge that has resulted in doubling of cash and derivative turnover may temper downwards in case the markets remain in negative zone.

What is your take on the US elections results?

Donald Trump's recent victory speech emphasized his commitment to ending wars, which initially boosted global market sentiments. However, ongoing geopolitical conflicts and aggressive Republican strategies may negatively impact global growth and trade. The anticipated trade conflict with China, driven by its rising dominance, adds to these tensions.

Market movements will likely hinge on proposed tax cuts, larger fiscal deficits, and deregulation, with Republicans aiming to reduce corporate income tax from 21 percent to 15 percent. This could enhance business confidence and earnings growth but will also load additional burden on a already strained fiscal situation. The trajectory of escalating geopolitical tensions remains a key factor to monitor which can negatively impact both US and global economic stability, potentially undermining growth prospects.

Do you see 25 bps cut in fed funds rate in the last FOMC meeting of the current year in December?

As anticipated the Federal Reserve proceeded with a 25 basis points (bps) rate cut in the November meeting. Going forward it will be particularly interesting to monitor the Fed’s decisions and guidance regarding further rate cuts, especially in light of the recent election outcome, which resulted in Donald Trump being re-elected as president. This has led to a spike in the US 10-year bond yield due to concerns about a potential rise in inflation stemming from anticipated tax cuts, trade restrictions with China, and other policies likely to be announced by the new administration. Given this context, along with the latest inflation and job data that present a mixed picture of the US economy, we believe the Fed may adopt a more cautious stance concerning further rate cuts starting from the December meeting.

Is it a great time to add exposure to banking and technology space?

Valuations in the banking sector remain attractive, particularly for private banks, which have seen limited participation in the equity market rally over the past 18 months. While banks are currently experiencing compression in net interest margins (NIMs) and showing signs of sluggish deposit growth, these factors indicate that credit growth may also moderate in the near future. However, considering a longer-term investment horizon and the current valuations at which some banks are trading, we believe the risk-reward profile in this sector appears more favourable compared to many others.

Regarding the technology sector, we maintain a neutral stance. Technology companies have been under pressure for the past 12 to 18 months due to the global economic slowdown and reduced tech spending, leading to slower earnings growth. Looking ahead, potential rate cuts and favourable tax policies for US companies could stimulate an increase in discretionary spending among these firms, resulting in reasonable earnings growth for the sector. However, we do not expect a spectacular revival in earnings growth; thus, we anticipate moderate returns from the technology sector over the next 12 to 18 months. There are stock specific opportunities in both sectors and investors should approach with a balanced perspective, considering both short-term challenges and long-term potential.

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