"The spread of 125 bps between Indian and US policy rates is at a multi-decadal low. Hence, the scope for an early rate cut is low, as a lower spread exposes the fragility of the Indian current account, which may trigger a negative loop with weaker FX and higher volatility," says Azeem Ahmad, Senior Director, Discretionary Investment Services, Waterfield Advisors, in an interview with Moneycontrol.
The financial service professional, with more than 20 years of experience in multi-asset fund management, portfolio management, equity and derivatives management, believes now is the time to focus on the conventional asset allocation framework as the markets are treading on stable domestic macros, despite an imploding global backdrop.
He said that there is merit in looking at domestic sectors, and select traditional pharma companies and power utilities are a good place to hunt for some stock-specific play.
Edited excerpts:
What is the possibility of a global recession, considering the economic data points, especially in the US and in Europe?
The global macro backdrop continues to remain tumultuous in 2023. While 2021 saw rapid economic growth, rising inflation and zero rate policy (aiding strong performance from risk assets, SPX up 30 percent), 2022 saw slowing economic growth, overshooting inflation and aggressive rate hikes (dampening risk assets, SPX falling 18 percent). Year 2023 has, so far, witnessed deceleration in growth and inflation, which is likely to trigger a pause in 2023.
Clearly, this was a complete cycle at play, where 2021 was early to mid-cycle, 2022 was mid- to late mid-cycle, and 2023 is panning out to be a late cycle.
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Leading economic indicators, whether it is the economic surprise index or Industrial production, are decelerating. Financial markets' red flags, in terms of regional bank duress and deep inversion of the yield curve, point to heightened volatility. Hence financial and economic variables are pointing at decelerating growth and heightened volatility, which are typically variables of a late cycle.
The second half of 2023, hence, is seemingly looking difficult to tread without seeing a material slowdown and/or shades of recessionary impulse. However, looking at the strength of systemically important banks, corporate and consumer balance sheets, and rate cut buffers that central banks have, the magnitude and length of the downturn seem limited.
What is your take on electrical equipment?
The demand for a wide range of consumer durable goods is growing as disposable incomes are increasing and thanks to technological innovation in India. This, in turn, is fuelling fierce competition among various consumer durable brands.
The Indian appliances and consumer electronics industry stood at $9.84 billion in 2021. It is expected to more than double to $21.18 billion by 2025.
As of 2021, the refrigerator, washing machine, and air conditioner market were estimated around $3.82 billion, $8.43 billion, and $3.84 billion, respectively. The market size of air conditioners is expected to grow to 165 lakh units by 2025 from 65 lakh units in 2019, while the market size of refrigerators is expected to grow to 275 lakh units by 2025 from 145 lakh units in 2019.
Do you expect a rate cut by the RBI towards the end of this calendar year, if the monsoon turns normal?
Monsoon, clearly, is one of the key variables (after crude) that influences inflation in India. If one works with the assumption of a normal monsoon, the rate trajectory in India will be a function of developed market rates, especially that of the US.
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The spread of 125 bps between Indian and US policy rates is at a multi-decadal low. Hence, the scope of an early rate cut is low, as a lower spread exposes the fragility of the Indian current account. This may trigger a negative loop with weaker FX and higher volatility. In the current global macro scenario, which is flashing with late-cycle impulses, any major monetary policy move has to be well-calibrated and telegraphed.
Do you think the equity markets will find it tough to reclaim record-high levels in the coming months?
While on a headline level, the Nifty looks richly valued (22X trailing) but if one looks at the visibility of the current earnings cycle (strong visibility from domestic sectors) and sentiments (FII flows negative in trailing 12-month, weak investor addition, and IPO market), they suggest a strong underlying set-up for Indian markets, where the drawdown seems limited and upsides into uncharted zone are quite likely.
If the global financial markets hold up well, the glide path for Indian equities into a newer orbit is very likely.
What is your take on the ongoing corporate earnings season and commentary? Also, your outlook for FY24?
Nifty EPS in Q4FY23 is likely to be at a two-year high of Rs 220 (up 7.3 percent QoQ) and it is, indeed, expected to be better than the December quarter.
In terms of positive surprises, they were witnessed across the BFSI space, (strong credit growth and continued elevated NIMs), oil & gas domain as well as auto pack (margins continue to expand), while the IT sector largely underperformed (impacted by muted global growth outlook).
As markets tread on stable domestic macros, despite imploding global backdrop, now is the time to focus on the conventional asset allocation framework. On equity, per se, this is the time to be more stock- and sector-specific.
In this regard, there is merit in looking at domestic-facing sectors like capital goods/infrastructure/cement (strong macro tailwind in the form of high government capex, recovery in margins and optimised working capital requirement), and banks (strong credit cycle, lower credit costs and fair valuations).
Select traditional pharma companies and power utilities are also a good place to hunt some stock-specific plays.
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