"It is difficult to estimate that inflation is likely to peak out in this calendar year. However, given the expeditious and synchronised tightening by global central banks, demand is likely to come off due to cooling down in the labour market," Kunal Valia of Waterfield Advisors told Moneycontrol in an interview.
The risk is that the Central banks go too far, too fast and given that monetary policy impacts the economy with a lag, chances of stagflation in 2023 is high in some of the large developed markets, the Chief Investment Officer of Listed Investments at Waterfield Advisors believes.
The US dollar already had a significant upward move in 2022. Valia, who has more than 21 years of experience in Indian capital markets, see this as a peak (for US dollar), unless stagflation hits the developed world for a prolonged period.
However, the US dollar will continue to be a beneficiary of both Fed tightening and recession concerns and any deep correction is unlikely till 2023, he says. Edited excerpts:
After management commentaries, do you expect significant earnings growth in India in the second half of FY23 and next financial year?
Well, the management commentaries across sectors remain a mixed bag. There is a sense of optimism in select sectors, driven by resilience showcased by the domestic economy.
However, there are sectors wherein the commentaries sounded cautious on account of weak global macros and high inflation. We expect sectors like infra & engineering, cement, speciality chemicals, large banks, autos (passenger vehicles & commercial vehicles) to perform better.
Do you see any sign of inflation peaking out (globally and domestic) in third quarter of this calendar year?
It is difficult to estimate that inflation is likely to peak out in this calendar year. However, given the expeditious and synchronised tightening by global central banks, demand is likely to come off due to cooling down in the labour market.
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The risk is that the Central banks go too far, too fast and given that monetary policy impacts the economy with a lag, chances of stagflation in 2023 is high in some of the large developed markets.
Do you expect the Federal Reserve to go for couple of more interest rate hikes before taking a pause? What are other things that Fed can do to control inflation if it still remains elevated?
The Fed has signalled a further 125bps of rate increases by the end of the year, European Central Bank (ECB) communications have turned increasingly hawkish, and the Bank of England (BoE) looks set to accelerate its pace of tightening given upside risks posed by currency weakness and proposed fiscal stimulus.
We expect a few more rate hikes from the Federal Reserve. We expect a pause once data points to slide in inflation. However, we don’t expect inflation to fall to a level where the Fed will be comfortable lowering rates at least for next few quarters. Inflation has remained elevated and the broader economic environment—most notably the labour market in US and Europe has proved resilient.
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As a result, we expect central banks to remain on a hiking path, with policy rates expected to rise to a higher level than anticipated last quarter.
Do you have a cautious or cautiously optimistic or bullish view on IT sector as most of negative news already priced in?
Given the price correction, we are cautiously optimistic on the IT sector both in India and Globally. However, we expect time correction and rangebound move for a few quarters and thereby advise investors to take time to build position.
Do you expect the US dollar to strengthen further in rest of financial year and will that bring rupee down to around 85-86 levels and more?
The US dollar already had a significant upward move in 2022 and we see this as a peak, unless stagflation hits the developed world for a prolonged period. However, the US Dollar will continue to be a beneficiary of both Fed tightening and recession concerns and any deep correction is unlikely till 2023.
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Do you think it is the best time to bet on gold as it is the biggest underperformer amongst commodities?
In past market cycles where there has been a high degree of uncertainty and elevated inflation, gold has seen strong interest. However, the current situation has been different for Gold.
Despite an uncertain economic outlook, no end visible to Russia-Ukraine war, gold has been on the sidelines since 2021. Gold as an asset class faces near term challenges from other investment avenues particularly the attractiveness of short tenor US Dollar Bonds. However, a correction in gold price may bring some interest for long term investors.
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