Daily Voice | Rate hike cycle may extend into 2023 as well, given sticky and elevated level of US inflation, says this chief investment officer

The weakness in the IT sector is the reflection of the global slowdown and the expectations of a dip in global deals for Indian IT companies. Despite the recent correction, we believe the valuations are still higher than their historical averages. Therefore, we would remain cautious at current levels.

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What are the factors that will still make the markets volatile, though it is gradually inching toward a record high?

While the profits for Indian corporates have been robust, the relatively rich valuations, when compared to the global markets coupled with the expectations of weaker earnings from some export-oriented companies on the back of slowing global growth, make the Indian equity markets volatile.

Moreover, the uncertainty in businesses linked to global commodities could be another reason contributing to the current bout of high volatility in the equity markets.

Given the inflation above 8 percent, do you think the US Fed will continue to be hawkish and hike interest rates by 75 bps each incoming policy meeting for the rest of the year?

In his recent Jackson Hole speech, the US Fed Chair Jerome Powell reiterated the inflation focus of the US Federal reserve and expected higher interest rates to persist for some time and was of the view that the current rate was no place to stop or pause the rate hike cycle.

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This would mean further hikes in the Fed funds rate in the next few FOMC meetings, the quantum of which will be data dependent. The rate hike cycle might extend into 2023 as well, given the sticky and elevated level of US inflation.

Most global investors expect India to attract significant FII inflow. Do you agree with them?

India remains among the few sweet spots in the otherwise tepid global economy. Given this context, we believe that the FIIs cannot afford to ignore the Indian economy for long and would have to invest in the Indian equity markets in the medium term.

Moreover, we have witnessed buoyancy in the Indian equity markets despite consistent and large FII selling over the last many months, primarily on the back of robust domestic flows. That said, FIIs have turned buyers in the month of August.

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What are the themes that you are keenly focusing on now, given the changing global and domestic environment?

While we do not specifically invest in themes and primarily focus on bottom-up analysis for stock selection, we believe Financials and Manufacturing could be the key themes to invest in, given the current market scenario.

Fitch has cut its growth forecast for FY23 as well as FY24. Do you expect a further cut in the growth forecast, and why?

We believe that the Indian GDP growth trends need to be seen from the perspective of the falling global growth scenario and not in isolation. Given this context, India should also be the fastest growing top10 global economy this year. On the positive side, private consumption growth continues to recover, supported by urban consumption recovery, as formal sector employment growth has been strong. Moreover, the pick-up in capacity utilisation, Central Government capex, and an uptick in contact intensive services should support domestic economic activity.

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