Mitesh Dalal of Standard Chartered Securities (India) firmly believes the markets will bottom out prior to economy bottoming out.
"September 2022 onwards the inflation print is likely to moderate on year-on-year (has started moderating on quarter-on-quarter) with base effect playing out. This is likely to propel central banks to adopt softer stance amid the recession fears which is likely to play as catalyst for markets to resume fresh journey," says the chief investment strategist who has spent over 25 years in financial markets.
Dalal, who has been with Standard Chartered Securities (India) for the last 13 years, has an 'overweight' view on pharma and telecom sectors. In an interview with Moneycontrol, he shares that large-cap stocks will be the key beneficiary of the global ETF flows if they return.
Do you think the market will get a sense about the current risk factors and resume its northward journey by September-end towards record high?
The key headwinds from the Indian macro perspective like inflation, higher interest rates, rising fiscal deficits and unhinged balance of payments towards a weakening rupee are likely to moderate with falling commodity prices and softening of crude oil. The markets have started sensing these risk factors via tempered down valuations.
We firmly believe that the market will bottom out prior to the economy bottoming out. The inflation print is likely to moderate on-year (has started moderating on quarter-on-quarter) September onwards with base effect playing out. This is likely to propel the central banks to adopt softer stance amid recession fears which are likely to play as catalysts for markets to resume fresh journey.
What is the sense you are getting from the dollar index, bond yields, inflation print, US economic data points and so on? Do you see a slowdown in the US or a recession?
Recession risks are rising in the US and Europe, with consequences for global growth in late 2022 and 2023. However, it is expected that commodity prices to fall over the next 18 months as production rises and demand eases.
The consensus view among economists is that the Fed funds rate will continue to rise to 3.75 percent by mid-2023; markets are pricing in a peak rate of over 3.50 percent by Q1-2023. Median predictions from the latest poll by Refinitiv showed 40 percent probability of a US recession over the coming year (up from 25 percent in June poll), with a 50 percent chance of one happening within two years. Over 90 percent of respondents to Reuters said any potential recession would either be mild or very mild.
In case of a recession in the US, do you think short-to-medium-term investors should wait before taking positions in the IT space after an over-33-percent correction? And, also, what about the long-term investors?
We remain neutral on the IT sector due to moderation of revenue growth from high-teens in FY22 to low teen in FY23 along with the pressure on operating margins due to wage hikes, higher travel cost. Strong US dollar is likely to partially offset the margin pressures.
The recent correction across the IT sector has made valuations reasonable, however, we prefer large-cap IT service companies versus mid-cap IT services as they continue to trade at premium to large-cap IT companies.
Near-term bounce cannot be ruled out technically (alongside jump seen in the US IT stocks), however, long-term investors can add large-cap IT companies on every dips, given the reasonable valuation and lucrative dividend paybacks.
In case there's a return of FIIs to India with heavy inflow in the coming months, which sectors that would be in focus?
Banking and IT sectors (being the index heavyweight and having large free-float across the stocks) are likely to be key beneficiary with FPIs turning buyers.
We remain positive on export-oriented sectors like chemicals, engineering companies and auto components where fresh FPI inflows have potential to result into valuation re-rating.
We have Overweight view on Pharma and Telecom sector. Largecap stocks are likely to be key beneficiary of global ETF flows if they return back.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.