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Daily Voice | Market far from being in a stable territory, pick these 4 themes, says Varun Lohchab of HDFC Securities

We don't believe that bear market phase is over as the near-term risks might be known but their quantum & duration of existence are still unknown, said Varun Lohchab of HDFC Securities

May 23, 2022 / 08:29 AM IST
Varun Lohchab is the Head of Institutional Research at HDFC Securities.

Varun Lohchab is the Head of Institutional Research at HDFC Securities.

Commodity prices are yet to stabilize and their future course of movements will dictate future actions of global central banks, hence, we believe market is far from being in a stable territory, Varun Lohchab, Head of Institutional Research at HDFC Securities said in an interview to Moneycontrol.

The recent market correction has certainly provided some pockets of interesting investment opportunities, he said, adding HDFC Securities is bullish on the auto sector, which has underperformed for the past few years.

The market veteran's advice of the participants is to choose bottom-up stock analysis to pick the fundamentally strong companies. Read the edited excerpts here:

Do you think the bear market phase is over?

We don't believe that bear market phase is over as the near-term risks might be known but their quantum and duration of existence are still unknown. While we're already in an inflationary environment, it is still to be seen how long does it last for. Prices of key commodities like crude, steel, coal, natural gas and palm oil have shown early signs of stabilizing after a steep rise but are yet to meaningfully decline.


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Hence, pressure on CPI (consumer price index) and WPI (wholesale price index) continues which is adversely impacting consumption expenditure, household savings and corporate profitability. Also, while market has discounted certain expected interest rate hikes by US FED and RBI, any surprise with respect to quantum or pace of these rate hikes will trigger market jitters. Steeper-than-expected FED rate hikes could increase the quantum of FII outflows impacting market sentiments.

As, trajectories of commodity prices are yet to stabilize and their future course of movements will dictate future actions of central banks, we believe market is far from being in a stable territory.

Is the expected earnings downgrade in the coming couple of quarters already priced in by the market?

As recent leg of commodity inflation became more prominent post outbreak of Russia-Ukraine war in the latter half of February 2022 and intensified subsequently, Q4FY22 earnings results didn't reflect its full impact. We expect the true intensity of inflation impacting earnings of companies in Q1FY23.

Aggravating inflation will drive future rate hike decisions of RBI. While direct impact of inflation on commodity consuming companies is discounted, its indirect impact on household consumption sectors led by reduced monthly savings is yet to be priced.

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It is expected to hit discretionary spending viz. retail, outdoor dining and travel. Further increased savings rates will trigger some outflows from equities to less risky assets like bank deposits.

Do you think the valuations are looking more attractive now? What are the themes to pick now, especially after the recent correction?

The recent market correction has certainly provided some pockets of interesting investment opportunities. We are bullish on the auto sector which has underperformed for the past few years due to various structural reasons. We believe that the worst is behind us and the sector will recover hereafter.

Over the medium term, we expect elevated metal prices to soften, supply chain disruptions to improve gradually and a pickup in demand to play out. We also have a positive outlook on select large banks with healthy CASA ratios that will be beneficiaries in a rising interest rate scenario.

Lastly, we are also bullish on Indian chemical industry which is witnessing historically high levels of CAPEX on the back of global supply chain diversification. The country is becoming a preferred manufacturing destination for international pharmaceutical & agrochemical clients as domestic companies are rapidly improving upon their technical capabilities.

It is imperative to note that while these sectoral trends are expected to play out, investors must do bottom-up stock analysis to pick the fundamentally strongest companies in each industry.

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Is it the time to focus on defensive stocks considering the macro environment?

While the macro environment is temporarily subdued, it is expected to bounce back strongly after a pause of few quarters driven by inherent long term tailwinds of Indian economy. Hence, we believe it is opportune time to look beyond current market weakness and invest in high conviction long term ideas rather than focusing on defensive stocks.

The recent market sell off has made some fundamentally strong companies available at attractive valuations. Long-term investors with a 3 to 5 years investment horizon can use this opportunity to consolidate positions in their respective high conviction stocks.

Such investors should realign the portfolio by trimming high valuation, low growth tail end stocks and replace those by stocks with long term earning growth visibility & moderate valuations.

Should one start accumulating banking & financial space given the bond yields are rising?

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While rising interest environment helps expansion of net interest margin for banks with healthy CASA, higher bond yields will hurt their treasury portfolios by way of increased mark to market losses. Also, while moderate rise in interest rates help banks as they increase their lending rates, a very steep rate hike can impede credit growth. As, we believe interest rate hikes in India will not be very steep, so select banks are expected to get benefitted. This would be a prudent choice to invest in select large banks with stable CASA franchise.

Pertaining to other financial services companies, we are bullish on the long term potential of the insurance and capital market sectors in India. The monthly SIP flows have been strong (grew from Rs 4,335 crore in March 2017 to Rs 12,328 crore in March 2022) and country's demat accounts witnessed a sharp surge (from 4 crore in FY20 to 9 crore in FY22).

Also, while the insurance penetration (total gross premium/GDP) in India is growing steadily it is only around 2 percent currently compared to 20-25 percent in developed nations. These are proofs of the financialisation of savings story beginning to play out.

Also, there is a long and profitable runway ahead for broking and asset management companies. With so much headway for growth, we are positive on the industry's long-term outlook. One needs to ensure to be stock specific in these industries while making investment decisions.

Do you expect three more rate hikes of 50 bps each by Federal Reserve? Do you think the same has already been priced in by the market?

US FED chairman has been unequivocal about doing "whatever it takes" to control inflation which is at an unprecedented levels in USA. As increasing costs of essential goods and services are outstripping wage gains, FED is expected to keep raising rates till inflation falls in a clear and convincing way. It is widely expected that rates need to be elevated to more than 3 percent from current level of around 1 percent in order to curb inflation meaningfully.

In the wake of this situation, another three 50 bps hikes won't be surprising. While direct impacts of interest rate hikes might be already discounted by the market, its secondary impacts are yet to be fully priced in. As US households are relatively highly leveraged, so steep rise in rates will increase monthly mortgage and credit card payments leaving less room for consumption expenditure.

Further, savings rate will become more lucrative than earlier. A combination of incentive for savings and an impediment to borrowings will lead to a decline in consumption expenditure. This will adversely impact all rate sensitive consumption sectors namely housing, auto and retail. Currently we are dealing with a multitude of volatile economic variables such as global inflation, high commodity prices, geopolitical tension, supply chain disruptions, etc. Any adverse incremental news flow on any of these could decisively drive central bank future moves and hence can impact an already jittery market.

Will the RBI take repo rate above 5 percent considering the increased focus on inflation concerns and elevated oil prices?

We expect the RBI to hike rates 3-4 times more this year and expect the terminal repo rate in this cycle at 5.6 percent. The RBI governor has already explicitly stated that the central bank will prioritize reigning in inflation over growth. What makes this inflationary environment particularly difficult is that it is led by global supply chain disruptions.

India is particularly impacted because of our import dependence on key commodities such as crude oil, coal, and natural gas. While the repo rate hikes will certainly help in curbing inflation to some extent, global commodity prices will need to soften for inflation to truly ease.

It is however imperative to note that the interest rate hikes expected in India will not be as steep as those expected in USA. Hence the impact felt by Indian corporates and households will be less acute compared to their American counterparts.

Disclaimer: The views and investment tips expressed by investment experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: May 23, 2022 08:29 am
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