There are divergent voices on the market dynamics with one group anticipating further corrections and another saying that the market that bottomed out and the only way ahead is up.
Kunal Valia of Waterfield Advisors falls in the first category, though he hopes that the market will remain in a range of 15,000-17,000 as factors like oil prices, rupee behaviour, rate hikes, and inflation will continue to have an impact on the stock market.
The Indian equity market has been rangebound within 15,000 and 17,000 through the last 3-6 months.
Seasoned in the Indian capital market for over two decades, Kunal sees that the global central banks would raise rates in 2022. And, thereafter, there could be a somewhat measured rate hike or probably a complete halt in 2023 as they assume that starting next year there will be some kind of cooling off in the inflation numbers, he shares in an interview with Moneycontrol. Excerpts from the discussion:
Do you think the inflation fear will ease off in the September quarter?
There is very little evidence to support that. In the US, the Federal Reserve has a base mark inflation target of 2 percent and given that they are targeting inflation in a more flexible way, we can assume that the base range of inflation will be in the region of 2 percent - 4 percent which the Fed may be okay with. But we do not think that the Consumer Price Index (CPI) inflation level of 8-9 percent will come down to 4 percent by September in the US. As a result, we may see rate hikes which are projected by the Fed now to take the Federal Reserve to somewhere between 3 -3.5 percent and bring down the inflation to 2-4 percent range.
In India, the Reserve Bank of India has set an inflation target in the range of 2-6 percent for the consumer price inflation. The CPI is currently 7 percent which is beyond RBI's target. Therefore, we can expect RBI hiking rates in the upcoming policies. Secondly, if the Fed hikes rate, then India and other emerging markets will have to hike rates in their respective economies as well.
We will continue to see global central banks to raise rates in calendar 2022 and thereafter, we can expect a somewhat measured rate hike or probably a complete halt in year 2023. We assume that starting next year there will be some kind of cooling off in inflation numbers.
What are the sectors or stocks on your shopping list in this volatile market?
Technology is one sector where large corrections have taken place since October last year. We think that the sector is undergoing valuation re-rating because the sector was overvalued from the time the pandemic began as people increased their usage of technology and digital tools in a manner which we have never seen before. Huge valuation re-rating has taken place between March 2020 and October 2021.
However, since October 2021, we have seen a bit of demand subsiding for the technology sector as valuation correct for the sector. Having said that, since a lot of IT stocks in Nasdaq and Indian IT stocks have witnessed a correction of 25-35 percent, the sector will offer a reasonably good opportunity and entry point as well in the next three to six months' time.
Now the global markets are worried about the US recession but most experts expect that to be shallow and short-lived.
Our base case assessment indicates a stagflation in the US. The fear which investors are living with is that there is a fair chance that the Fed is likely to overshoot its interest rate hike assessment and quantitative tightening assessment, a scenario where the Federal Reserve will allow bonds to mature and not reinvest the proceeds coming from maturity, will have a much more tightening impact than is being envisaged right now.
In the past, both of these actions have led to recessionary fears in US markets. But what it also does is that any larger than expected slowdown in US GDP and consumer demand will put a brake on future rate hikes and quantitative tightening.
We expect that over the summer of 2023 there will be rate cuts or some kind of easing from the Federal Reserve in case the recession fear goes up. That is our broad view. Our base case assessment is that after hiking rates in 2022, Fed will reassess the growth versus inflation starting first quarter of 2023 and thereby will opt for a measured rate hike or a complete pause.
We are seeing some cooling off in commodity prices, including oil. Do you think the RBI will take a pause after the August policy meeting?
Most commodity prices are falling due to fears of a recession and as a consequence of aggressive rate hikes by central banks across the globe which have negatively affected the demand. Not just Brent crude, but other commodities such as gas and palm oil, metals such as gold, silver, aluminium, and food items like wheat, soybean, sugar are all selling for significantly cheaper than before.
But that does not give enough room to stop rate hikes as the inflation in India continues to be above the comfortable band. We will not see the Fed stop rate hikes any time soon. Given the current global scenario, RBI is in no position to give any leeway to the Indian economy.
Do you still think the market will undergo one more round of deep correction. If yes, then what could be the reasons and risk factors that can cause this correction?
Yes, I'm very sure that there will be another correction in the market. However, the extent of it is something which is difficult to predict. At present, the Indian equity market is rangebound between 15,000 and 17,000. It has not ventured out of that range in the last 3 -6 months and we hope to see it continue in that range. Factors like oil prices, rupee behaviour, rate hikes, and inflation will continue to have an impact on the Indian stock market.
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