Daily Voice | Why this strategist is alert on FIIs amid fresh financial uncertainty triggered by SVB

Is it the time to bet on India-focused companies or on export themes?

It is time to bet on supernormal companies available at supernormal prices; meaning companies which fit the Scientific Investing Framework. Companies with low leverage, persistent competitive advantages, large growth opportunities driven by strong growth vectors, and which are available at prices significantly below their conservatively determined intrinsic values. Lots of domestic companies fulfil these criteria. Lots of global companies, too, fulfil these criteria.

Of course, Europe still remains beleaguered with the Ukraine-Russia war, Asia is under continuous threat from China's possible actions against Taiwan, India or other countries and the Middle-East has its own challenges. With the Silicon Valley Bank incident even the US is facing some uncertainty.

However, keep in mind that the US Fed, the Treasury and the US policy makers have recent memories of the Lehman crisis and are likely to take proactive steps to understand the interlinkages of SVB with other banks, institutions and companies, and take aggressive actions to prevent a repeat of something similar. Providing adequate liquidity to the system and to the specific entities which are likely to be impacted by SVB is the clear focus. Under these circumstances, it is quite unlikely that there will be too much spread to other banks etc.

Of course, no need to hurry into US stocks immediately, but one should definitely track how things are evolving for the next few weeks. In the meanwhile, the several domestically-focused supernormal companies are still available at supernormal prices without any such uncertainty lurking in the Indian system.

Do you think the CPI inflation may get back to over 7 percent for a couple of months in the rest of the calendar year, though the RBI expects it at 5.4 percent in the second half of this year?

It is unlikely based on current information. But it is possible temporarily if supply chain issues hit some products.

Do you think the Federal Reserve can take the fed funds rate to 6 percent in the rest of the calendar year if the inflation is going to prove to be more persistent?

It looks more and more unlikely that the Fed will do that. Inflation has been showing a downward trend given that a lot of it was driven by supply chain issues which have cleared up now. The Fed is already at 4.5 percent to 4.75 percent. While just last week there was speculation of a 50 bps rate hike in March instead of the earlier expected 25 bps, with the SVB incident it is likely that the Fed sticks to, at most, a 25 bps raise and simultaneously announces measures to increase liquidity in the system.

Also, keep in mind that a financial crisis triggered by increasing interest rates is a more problematic situation in the short-term and can potentially cause immediate multi-trillion dollar damage. But a slightly higher inflation, while not a good thing in the long-term, doesn't immediately cause such damage. Given such consequences it is likely that the Fed will focus on the more urgent problem of preventing a financial crisis and then in the slightly longer-term focus on further increasing interest rates if the inflation persists despite the current near-5 percent Fed funds rates.

Right now the SVB bank balance sheet indicates that there will be other institutions with a similar mismatch between their asset side, which was in long-dated securities, and which are currently in significant losses due to the aggressively hiked Fed funds rates in the last 1 year. The Fed’s near-term job will be to run and emergency stress test of the money-center banks and also of the regionally important other banks supporting different industries, similar to what SVB was for the high-tech and startup industry.

Once that exercise is over and potential weak links are identified, the ways in which these potential problems can be handled by providing adequate liquidity will be developed. Once such a potential crisis seems to be quite unlikely based on the bank/institution-specific stress-test scenarios and system-wide stress simulations will the focus shift back to inflation.

Do you expect the Indian economy to slow down for the next couple of quarters or for the rest of the calendar year?

We will be surprised if the Indian economy doesn’t grow at around 7 percent in this calendar year. With elections round the corner, the Government of India is likely to spend a lot on capital projects, even beyond the budget and also by finding innovative financing methods which are beyond the budget. The goal will be to complete projects which are near-completion and commission them and to initiate other mega projects.

Overall, the private sector balance sheets and bank balance sheets remain strong and the capex in the private sector is also long due with consumer demand consistently growing. It is likely that there will be growth investments from the private sector as well. We remain positive on near 6.5 percent-7 percent kind of growth rates and wouldn't be surprised if it actually exceeds that too.

Are you betting big on PSUs?

Yes, we are quite positive on many PSUs, but not because they are PSUs, but rather because they are exposed to amazingly strong growth vectors, have strong balance sheets, high capital efficiency, high growth, are near-monopolies, and are available at large discount to their intrinsic values. The focus is on the growth vectors and not on them being PSUs or private companies.

Even in the power sector which is a growth vector required to power the growth of the Indian economy, many severely undervalued companies are available with dividend yields matching the fixed deposit rates or sometimes even higher while their bonds are AAA-rated. These companies have large capital work under progress and are likely to start significant revenues from these projects in the next couple of years. Most of these companies are state-owned.

What are the big challenges for the Indian equity markets? Also what is the possibility of Nifty or Sensex closing the calendar year with double-digit gains or will it crash once again in the rest of the calendar year?

The challenges continue to be the impact of global factors. If the US SVB-driven financial uncertainty escalates, the FIIs are going to turn cautious and that could have an impact on the Indian equity markets. Other than that we don’t see any other big challenges.

Yes, Nifty and Sensex could see double-digit gains from here. A crash looks unlikely for only the Indian markets. If the global markets crash for some reason then definitely the Indian markets cannot remain decoupled. But we don't see any other major factors, except the SVB one, which are unfavourable at the global or domestic level.

Do you think technology stocks are unlikely to get into momentum unless the Fed gives indication of a rate pause? Till then, is it a 'sell on rise and buy on dips' theme?

Our opinion is very clear that the global and Indian technology stocks are providing exposure to the amazing AI-Revolution growth vector. A near-term focus on Fed interest rates by the investors and a focus on improving margins by cost-cutting to please Wall Street by the Big Tech and other tech companies is providing an attractive entry point to this multi-decadal growth vector.

We would be focused on this sector for accumulating from a long-term portfolio growth perspective.

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