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Daily Voice | This investment strategy chief believes equities to stay rangebound till hope of Fed pivot turns real

The future trajectory of FII flow, to a large extent, depends on the inflation in US and in India. Higher interest rates in the US typically lead to flows moving to the world's largest economy, resulting in the strengthening of the US dollar at the cost of emerging markets like India.

August 15, 2022 / 09:34 AM IST
Kunal Valia of Waterfield Advisors

Kunal Valia of Waterfield Advisors

Kunal Valia of Waterfield Advisors feels the current turnaround in stance of FII with regards to India is yet to be confirmed, but he believes a large part of FII selling in India is past us.

FIIs have invested Rs 12,190 crore in the last 10 days of August in the Indian equity market. The future trajectory of FII flow, to a large extent, depends on the inflation in the US and in India, the chief investment officer of Listed Investments at Waterfield Advisors shares in an interview with Moneycontrol.

Valia, with more than 21 years of work experience in Indian capital markets, says equities may continue to stay rangebound as has been the case for several months till the hope of Fed pivot turns real. "If the Fed pivots from monetary tightening, then stocks should perform better," he says.

Excerpts from the interview:

After looking at the consistent buying in India through the last few weeks, do you think the FIIs look confident to continue with their investments in Indian equities?

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Foreign Institutional Investors (FIIs) who were relentless sellers in the Indian market from October 2021 to June 2022 turned net buyers in July and the buying continues so far in August. FIIs have invested Rs 12,190 crore in the last 10 days in the Indian equity market.

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The future trajectory of FII flow, to a large extent, depends on the inflation in US and in India. Higher interest rates in the US typically lead to flows moving to the world's largest economy, resulting in the strengthening of the US dollar at the cost of emerging markets like India.

We are not yet confident that inflation is likely to drop to the Fed's comfort level this year and at the same time we the recessionary trends are not yet broad based in the US economy to force the Fed to go gradual on rate hikes. So, the current turnaround in stance of FII with regards to India is yet to be confirmed. However, we believe a large part of FII selling in India is past us and we will have to monitor the Growth-inflation Dynamics for a few quarters to confirm the trend.

Are you still worried about twin challenges of high fiscal deficit and sharply rising current account deficit faced by the Indian economy?

The trade deficit had widened in June to an all-time high of $26.2 billion as imports surged past $66 billion. The domestic economy faces a twin challenge of high fiscal deficit and sharply rising current account deficit. While the fiscal deficit is funded domestically largely, the current account deficit (CAD) is a function of import-exports flows.

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We are more focussed on CAD numbers till FY23 as we are witnessing a surge and as per trends it is likely to shoot above 3 percent of GDP. This is a worrisome macro for FIIs, who have started showing renewed interest in the Indian market. The one silver lining in the midst of this is that the Indian equities and bonds have been resilient in comparison to most of the global markets.

Do you see any confirmation over the US and Europe recession or is it still a possibility?

We are yet not confident that inflation is likely to drop to the Fed's comfort level this year and whether recessionary trends are broad based in the US economy as the unemployment level is not rising and wage growth has been upward sloping.

Going ahead the journey of central banks from reflationary policy to disinflationary policy through high cost of capital coupled with high commodity prices may lead to higher earnings downgrades than what is estimated currently by equities.

While short-term priority is to bring down inflation at any cost, in the long term we doubt that central banks will be willing to risk a prolonged stagflation/ recession. With regards Europe, base case as of now is that of recession as high energy prices, continuing Russia-Ukraine situation and PMI numbers plot a cloudy outlook.

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Are you still cautious on the IT space due to rising fear of recession in the US and Europe?

The IT sector had witnessed a bull run between April 2020 and December 2021 with valuations skyrocketing. Post 2021, with the Federal Reserve changing its stance and moving to normalisation of monetary policy by raising rates and talking of reduction in balance sheet, US markets saw a sharp decline with Nasdaq leading the fall. This had a mirror impact in India's IT sector with the sector being bottom of the table year-to-date.

Investors will be better off considering a diversified portfolio rather than preferring a theme or a sector as we are not out of the woods yet.

Do you really think the Federal Reserve can still stop the market from making fresh record highs?

Numerous factors are involved in the current market scenario. Going ahead the journey of central banks from reflationary policy to disinflationary policy through high cost of capital coupled with high commodity prices may lead to higher earnings downgrades than what is estimated currently by equities. In such a data dependent scenario, equities may continue to stay rangebound as has been the case for several months till the hope of Fed pivot turns real. If the Fed pivots from monetary tightening, then stocks should perform better.

Do you expect a strong revival in primary market sentiment with the healthy recovery in equity markets from June lows?

Primary market sentiment continues to be cautious and may only follow suit if secondary market continues to see positive flows from FIIs over next few months. Given the slide in share price performance of some of the IPOs, retail and domestic institutional investors will be more cautious of the valuations of the upcoming IPOs.

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.
Sunil Shankar Matkar
first published: Aug 15, 2022 09:34 am
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