The central banks world over are expected to remain aggressive for the rest of the year. In such a scenario, with the geo-political crisis still far from over, volatility shows no signs of relent.
In an interview with Moneycontrol, Anitha Rangan, Economist at Equirus, shares that there is still a lot of dust around the emerging market (EM) and Asian equities story. "Once the dust settles (hopefully by the late second half of the year), we can see flows resume again," she says.
Rangan believes that India remains an attractive opportunity given its strong fundamentals and the government's proactive approach to cushion the economy against headwinds. While there may be some intermittent correction, if one thinks of a long-term story, India’s PE ratio seems attractive, she says.
Excerpts from the interview:
Considering the macro environment, do you think inflation will peak out in the coming months?
Inflation peak-out has two factors – one, the real price impact and two, the base effect. Base effect means the base of previous high inflation in the denominator will automatically temper the inflation eventually unless there is a spiralling rise in prices (which is not the case). The second impact on the real prices might take some more time which will actually lead to decline in inflation (as on a higher base, a decline in price will show a decline in inflation).
As per news reports, there is option for large quantities of Russian oil finding its way to India. This could be an additional India-specific positive to control inflation. Also note that in terms of food (other than oils) we are largely self-sufficient in production and thanks to record harvests we have sufficient produce.
With supply side interventions from the government, food prices can be cooled. The flip side is with demand picking up eventually the second impact will be lesser. However, factoring in both especially if commodity prices start to cool off due to supply side factors, we should see inflation peaking out.
Do you see a caution even now not only on emerging markets but also across Asian equity markets?
Global central banks are expected to remain aggressive for rest of the year. In such a scenario, coupled with the fact that the geo-politics has not yet reached any closure, volatility is here to stay for some more time. In any Developed markets rate hiking cycle, emerging markets tend to get impacted.
Therefore a sense of caution will continue to prevail, but one can expect a more rangebound behaviour rather than a one-sided action. Some of the caution is also led by China slowdown. Once China's Covid woes improve, there could be some recovery overall.
In aggregate there is still lot of dust around the EM and Asian equities story and once the dust settles (hopefully in the later 2nd half of the year), we can see flows resuming again.
Do you see more measures from the government to rein in inflation and reduce the RBI's burden in coming days despite a widening fiscal deficit?
The government is actively monitoring the demand supply situation of commodities including essential commodities not just with the objective of taming inflation but to also make sure that the supply of essential commodities like food is not hampered. We can anticipate more measures from the government side in terms of rationalizing duty structures which should help control inflation not just in the short term but also medium term.
While one can say that it is at the cost of fiscal deficit, these are early days. So far government has not announced any additional borrowing and revenue side looks robust. Recall that the budget estimates on the revenue side have been conservative and therefore it is possible that the government is using the room on the revenue side for additional expenditure.
In addition, there is perhaps confidence that if inflation is controlled, recovery in demand can offset the consumption loss due to inflation and therefore offset the fiscal pressures.
Overall, we can say that the measures are inevitable and fiscal measures, complementing monetary measures are necessary even if it comes albeit at a small fiscal cost.
In the Indian context, it is challenging for RBI to undertake all the heavy lifting as RBI may be constrained in terms of the pace of its hike. Fiscal measures in conjunction is therefore supportive. One can therefore expect more measures to come, but that will depend on the sectors and commodities where the prices remain elevated due to supply side factors.
Is it better to buy real estate space now or go with sectors related to real estate space?
In any volatile environment, one can always find quality picks across sectors and not just real estate. Real estate with the history of recent stress is always one sector looked with an extra pair of glasses. However, much of the historical stress is away and the current cycle is not driven by the leverage issues of the past and therefore one can find quality names in this space as well.
It is also imperative to note that in the post pandemic world, the landscape of real estate sector has changed immensely. Stronger developers have survived and demonstrated their strength, governance has improved, sector cash flow and visibility is much better and consolidation among developers (smaller with larger) has helped.
Options like Real Estate Investment Trusts (REITs) are showing promise. And not to forget the RERA of the past, has over a period really helped to strengthen the demand and investor confidence in the sector. Furthermore, the pandemic has changed the demand supply dynamics immensely of residential and commercial demand.
Let us not also not forget the focus on climate change and green energy initiative which offer immense potential for development and redevelopment. Also, one can no longer take a pan-India approach. The dynamics have become more granular. Companies with good governance, strong balance sheet and a strong hold in the respective micro markets will prevail.
The Nifty50 traded at price-to-earnings of 18-18.5 times one-year forward, which is still 15-20 percent higher than the average of last 10-15 years. Does it mean the correction is yet to be over or will India continue to trade at higher premium?
India remains an attractive opportunity given its strong fundamentals and government's proactive approach to cushion the economy against headwinds. In addition, RBI is also expected to act with its rate hikes to counter global rate hike headwinds. While there may be some intermittent correction, if one thinks of a long term story, India’s PE ratio seems attractive. Note that the premiums have corrected from the 20s to this level which indicates attractive entry opportunities.
Auto is the least impacted segment in correction we have seen before the recent recovery. Does it mean the space has bottomed out and one should start buying the space with a hope of sharp up-move in coming months?
Yes. The sector has over the past few years struggled with tepid demand, high fuel costs, high raw material prices, chip shortages and other host of issues. We foresee the sector to show robust financial performance which should reflect in performance of stock prices as well.
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.
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