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Fed impact | Equity class can undergo a stage of stagnation during the year

In the short term, it is advisable to turn cautious and take profits especially in stocks and sectors sensitive to interest rates and FII inflows.

June 19, 2021 / 11:08 AM IST

This week was expected to be heavy for the equity market due to the release of key economic data and the Federal Reserve's policy announcements.

As a result, the Indian market followed the weak global trend starting June 14 but on a positive note, the market recovered initial losses led by gains in heavyweights. Four strong IPOs during the week also helped the market to maintain its overall optimism.

High domestic CPI and WPI inflation of May, which rose to 6.3 percent and 12.94 percent, respectively, breaching the RBI's comfort zone, did not impact the market. Because this hyper price benefited from low base and fuel prices this is unlikely to lead to a change in the RBI's low-interest policy.

Nevertheless, the key point of discussion for the domestic market were Fed's decision and whether they would lead to a change in FII inflows. The global market was uncertain ahead of the Fed meeting, the uncertainty increased following the announcement of a weakened month-on-month sales and rising prices in the US, adding to concerns over the ongoing inflationary trend.

The two-day Fed meeting, on June 15 and 16, dominated the behaviour of investors, looking out for any change in easy-money policy. It was widely known that the plausibility of a change in stance was low. The key point of anxiety was the comments on inflation trajectory, interest hikes and asset-buying programme.

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As expected, the Fed maintained an accommodative policy and calmed down concerns on inflation, saying it was short term and largely due to a low base. The Fed signalled bringing the rate hike forward from 2024 to 2023, not a concern to the market since it is still a long time away, but maintained the treasury and mortgage bonds buying programme.

Though all the dots were majorly in line with expectations, the global market maintained its negative trend due to a moderately hawkish view.

The Fed acknowledged that the US economy was verging towards normality. It increased the 2021 GDP forecast from 6.5 percent to 7 percent on the back of a strengthening job market and vaccination programme reducing further risk of Covid-19. This is likely to taper the size of the current $120 billion monthly bond-buying programmed.

It will lead to a rise in market bond yields, having implications for the pricing of equity assets. The US 10-year yield had the largest single-day jump in the last three months but retreated the next day.

It is possible that global bond yields rise during the year because of the likely tapering of the Fed’s bond-buying plan early next year. This will make the dollar more attractive compared to the risky emerging markets (EMs). The rupee is expected to depreciate. This can lead to a short to medium-term consolidation in the equity market, especially EMs. The overall environment for the equity market is still lucrative, given the low-interest rate and vigorous economic regime.

In the short term, it is advisable to turn cautious and take profits, especially in stocks and sectors sensitive to interest rates and FII inflows.

Increase cash in your portfolio and buying at dips will be a good strategy. Develop a balanced portfolio of equity, bond, gold and cash.

To be stock and sector-specific, stable cashflows and promising industry outlook will be the mode to maintain buoyancy of your equity investments. During this phase, sectors and stocks highly oriented towards the dollar income will outperform like IT, pharma and exporters.

Disclaimer: The views and investment tips expressed by 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.

 
Vinod Nair is the Head of Research at Geojit Financial Services.
first published: Jun 19, 2021 11:08 am

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