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DAILY VOICE | Fed may give advance notice on tapering this week followed by formal announcement in November: Milind Muchhala of Julius Baer

The Federal Reserve is expected to continue to remain accommodative in its monetary policy stance, which should be supportive for equities.

September 21, 2021 / 08:27 AM IST

Milind Muchhala, Executive Director at Julius Baer feels the Federal Reserve in its policy meeting on September 21-22 will continue to remain accommodative in its monetary policy stance, which should be supportive for equities.

The Fed may give advance notice on tapering in this week's meeting, followed by a formal announcement at the following meeting in November; however, the pace of tapering is expected to be gradual, said Muchhala who has over 20 years of extensive experience in the industry, including equity research, advisory and wealth management.

Edited excerpts:

Q: Do you think the Federal Reserve can announce tapering in its upcoming policy meeting later in the September?

The asset purchase tapering by the Fed is something that is inevitable; however, the key question that remains is the pace of tapering and the timeline. The Fed seems to be in no hurry to reduce asset purchases given the downside growth risks posed by the delta variant; the unemployment data is still faltering, while the inflation is expected to be transitory. The Fed may give an advance notice on tapering in this week's meeting, followed by a formal announcement at the following meeting in November; however, the pace of tapering is expected to be gradual.


Unlike the previous tapering in 2013, this time around the Fed has been preparing the markets well as to what to expect. Also, its decision to disentangle tapering from a decision on raising interest rates to mitigate any possible adverse impact on the economy augers well. Overall, the Fed is expected to continue to remain accommodative in its monetary policy stance, which should be supportive for equities.

Q: Considering the expected economic & earnings growth, do you think the BSE Sensex and Nifty can be doubled from current levels by 2025?

The markets, albeit the short term volatilities, are finally slaves of earnings. After several years of anemic earnings growth due to differing reasons at various points of time, we are finally getting into the positive side of the earnings cycle with a consensus expected earnings CAGR of 16-18 percent over the next three years.

The buoyancy in earnings is expected to be aided by a combination of multiple factors including an overall economic recovery domestically, increasing export opportunities across sectors, revival of the investment/capex cycle, buoyancy in commodities and the various cost cutting initiatives undertaken by Indian corporates, leading to operational efficiencies. If the earnings were to potentially grow at a CAGR of around 14-15 percent over the next 5 years, it would result in doubling of the EPS over the period, and accordingly the headline indices can follow suit.

Q: Have you spotted any themes which have to be part of portfolio from here on, and why?

We remain positively inclined towards domestic cyclicals and the sectors that can benefit from a revival of the investment cycle in the country; these could include Financials, Industrials/Infra, Auto, Building Material/Home Improvement, etc. We also continue to like the sectors which can benefit from the global opportunities – such as Chemicals, Pharma, IT, Engineering products, etc. - with India fast emerging as a credible sourcing alternative to China.

Lastly, one more emerging area of interest are the platform businesses and the New Economy companies, especially with increasing options being available for investors, as more and more companies in the space are getting listed or have lined up IPOs. With strong growth prospects, increasing digital adoption and asset-light nature, these businesses are increasingly being favoured by investors. While we like the new-age business theme, we would be selective based on the size of opportunity and valuations.

Q: Finally the government announced moratorium of four years on payment of adjusted gross revenue (AGR) dues for cash-strapped telecom sector. How will this moratorium help the sector and do you think it can solve the problem of the sector? What should be done to solve the sector's crisis?

The Government has finally thrown in the much-needed lifeline for the Telecom sector to address the liquidity woes, and it is definitely a welcome step. The Government has implemented a host of measures, including moratorium for deferred spectrum payments and AGR payments of four years, clarity on AGR, spectrum sharing, extension of spectrum period to 30 years, 100 percent FDI, government option to convert dues into equity, etc. All of these will provide greater operational flexibility and will result in significant cash flow savings for the players, which they can effectively utilize towards business investments, especially at a time when the sector is moving towards 5G network. These reforms, coupled with the inevitable tariff hikes (although the urgency of the need of tariff hikes could stand a bit reduced now), should definitely help to improve the health of the sector, promote healthy competition and protect the interest of the consumers at large.

Q: Several experts expect the bullish trend to continue for atleast next couple of years to four years. Do you agree with their view and why?

The two clear drivers that remain supportive for the equity markets are the improvement in economic activity and an up-tick in earnings cycle, apart from the strong liquidity support and the lack of equally attractive alternate asset classes. The economy seems to be on a steady recovery mode, as reflected by the various leading indicators, and this is expected to further pick up pace with a faster and wider vaccination drive. Over the period, apart from the structural drivers in the form of favourable demographics and rising income levels, an improvement in domestic manufacturing and a revival in the capex cycle are expected to provide a leg up to the economic momentum.

On the earnings front, as discussed earlier, we are clearly getting into the better side of the earnings cycle, which will remain supportive for the investor sentiment. Hence, albeit the short term corrections, especially after the sharp run-up that we have seen in the markets recently, we believe it would be fair to maintain a bullish bias over the next 2-4 years, and we would look at the interim dips to add positions in good businesses.

Q: Metals sector was the biggest outperformer in FY22 so far with 44 percent gains. Do you think the rally can extend further in coming weeks or is it the time to be cautious on the segment?

Metals have been seen a phenomenal run over the past one year, aided by a combination of some supply shocks, with production cuts and freight disruptions, and a steadily improving sentiment/demand environment with gradual post-pandemic normalization. The strength in the underlying commodity prices have helped the Metal companies to report extremely strong earnings and cash flows, thereby resulting in buoyant stock performances.

Although we are observing a super commodity cycle (i.e., with exceptionally strong cyclical forces), we do not expect it to be a commodity super-cycle (i.e., not supported by structural forces). Although the longer term outlook seems constructive, we would advocate some caution on the Metals sector in the near term, as the space is typically high beta and tends to display sharp volatility basis the movement of the underlying commodity prices.

Q: Will the chip shortage issue be a spoiler for auto sector in current festive season? Also what is your view on the PLI scheme announced for the sector? Is it the time to add these stocks to portfolio?

The Auto sector has remained challenged over the past couple of years with a muted demand environment, rising cost of ownership due to safety and emission norms, and Covid-led disruptions. The recent chip shortage has further added to the woes of the sector, especially at a time when the demand was just starting to pick up post the second wave of the pandemic as we enter the festive period. The disruption in manufacturing, especially in passenger vehicle (PV)/utility vehicle (UV) and premium motorcycles, due to the semiconductor shortage, is leading to significant increase in the waiting period for vehicles, something that the buyers may not well appreciate.

Regarding the recently announced production linked incentive (PLI) for the Auto sector, it is directed towards promotion of EVs and advanced automotive technologies, with exclusion of petrol, diesel and CNG vehicles. Hence, it augurs well for players focusing on the EV space and meeting the required criteria in terms of scale and investments. Overall, we remain positively biased on the Auto sector, as it has been a relative underperformer in the past few months, and we believe we could see a good volume uptick with normalization of activities, favourable progress of monsoon, and as we head into the festive season.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Sep 21, 2021 08:27 am

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