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Daily Voice | Good probability of US Fed rate getting close to 4% this year: Hemant Kanawala of Kotak Mahindra Life

Hemant Kanawala of Kotak Mahindra Life says if the US Fed continues to raise rates, then the expectation is that short term rates will be more than 10-year paper increasing the probability of recession.

September 29, 2022 / 11:05 AM IST
Hemant Kanawala of Kotak Mahindra Life

Hemant Kanawala of Kotak Mahindra Life

The US Fed has repeatedly shown its commitment to curb inflation and hence is likely to continue with rate hikes in the immediate future. Hence, there is a good probability of US Fed rate going close to 4 percent this calendar this, said Hemant Kanawala, Senior Executive Vice President & Head – Equity, Kotak Mahindra Life Insurance Company.

With rise in interest rates, probability of economic growth slowing down increases which can lead to cut in earnings. This can lead to further correction in equity markets, feels Kanawala, who has an experience of more than 15 years in the fund management industry.

In an interview to Moneycontrol, he said financial stocks are better placed than many other sectors.

Edited excerpts:

Can we expect the dollar index to go beyond 120 levels? Do you see US Fed raising the benchmark rate beyond 4 percent in the upcoming policy?

The currency value is determined by demand and supply dynamics in the near term. In order to control inflation, the US Federal Reserve is taking more aggressive measures in term of rate hikes and quantitative tightening compared to central banks of Japan, UK and Eurozone. This is leading to shortage of US dollar and hence its relative appreciation.

The US Fed has repeatedly shown its commitment to curb inflation and hence is likely to continue with rate hikes in the immediate future. Hence there is a good probability of US Fed rate going close to 4 percent during CY22.

Also read - Moneycontrol Poll | Yet another 50 bps rate hike likely this week on inflation overhang

What is the possibility of equity markets hitting June lows as the current global environment seems to be indicating we are not out of woods yet?

India corporate earnings have grown in the current year compared to previous year and this is likely to continue next year. Large part of the correction in equity markets is due to correction in valuation as monetary policy normalized in line with all major economies.

If the interest rates continue to rise, as discussed above, then there can be further pressure on valuation. Also, with rise in interest rates, probability of economic growth slowing down increases, which can lead to cut in earnings. This can lead to further correction in equity markets.

Do you expect significant growth in earnings in coming quarters despite current global environment?

Current expectation of earnings growth in FY23 is in mid-teens. Although domestic demand, both consumption and investment is robust, there are pressures being felt from global economy. This may lead to some cut in earnings for sectors exposed to external demand.

What are the factors that really indicating the recession is very much likely in the US as some global investment experts slowdown in the US rather than recession?

Verdict on this is yet to be out. The main indicator economist track is yield curve and any inversion, meaning long term interest rates are less than short term rates, indicates a high probability of recession few quarters ahead. Currently US yield curve has become flat from being very steep few quarters back. If the US Fed continues to raise rates, then the expectation is that short term rates will be more than 10-year paper increasing the probability of recession.

Also readIndia forex reserves set to shrink further, stir memories of 2008 crisis - Reuters Poll

Overall do you think Asia is better for investment than western world?

Asia had a prolonged bear market in last decade when US markets were doing well. Hence there is an expectation that investment excesses in Asia are less, valuation are reasonable and central banks in Asia have better ability to stimulate growth as inflation is not a big concern. However, some of the Asian economies like Taiwan are heavily dependent on western world for exports and they will be impacted by their slowdown. Hence investors will be better off focusing on countries with sufficient domestic demand.

Do you see a ferocious bull market in financials than others?

Financial have the benefit of reasonable valuation and sufficient opportunity to grow as domestic demand picks up. Hence they are better placed than many other sectors where either the valuation are expensive or growth outlook is muted.

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.
Sunil Shankar Matkar
first published: Sep 29, 2022 11:05 am