Interview | LIC issue to see ample rush from investors if uncertainties are controlled, says Sonam Srivastava of Wright Research

The bond yields broke the last psychological mark of 2 percent after the recent inflation numbers that reached a 40-year high in the US. Excerpts from the interaction:

Do you think the market has already priced in Ukraine-Russia crisis?

The impact of geopolitical tensions on the stock market is short-lived. This thesis is based on an analysis of several previous such events. But in the light of the Russia-Ukraine situation, the energy prices and other commodities might surge and intensify the inflation concerns.

Looking at the global market, we are spooked by inflation and are pricing in inflation concerns and subsequently the Ukraine-Russia tensions to a greater extent.

What are the great investment themes that one must consider now?

We are entering a high-interest rate environment soon, and the suitable theme would be to bet on stocks that benefit from rising rates. Equities, predominantly banking, high yield bonds, and commodities, do well in a rising rate environment, but the pressure on valuation increases, making the value stocks flourish.

The Indian economy might be strong now, but we have lagged the broader market in terms of growth during the pandemic. I would bet on the growth of the Indian economy as a prominent theme from here on as the world normalises after the pandemic. The sectors to bet on for this growth would be banking, infrastructure and technology. New-age e-commerce, fintech, electric mobility, and sustainable finance are again big themes that will come into play.

Do you think the expected rate hikes by the US Fed has started discounting by the global markets?

There is uncertainty and lack of clarity about the Fed rate hikes. The markets have therefore been weak in taking a direction. If the Fed comes out hawkish with accelerated rate hikes soon, the global market might get caught discounting the hikes and see fresh downfalls.

The current market is tough where the clarity on the stickiness of inflation, the presence of a commodity supercycle, or the resurgence of COVID are some tough questions to which no one has an answer. Volatility has been a consistent theme for months in light of all the confusion, and the market might have discounted a strictly hawkish Fed stance.

Do you think the US bond yields may cross the psychological 3 percent mark in the coming months?

Suppose inflation becomes a persistently rising problem in the US, and we do not see any easing in inflation that many speculate. In that case, the psychological mark of 3 percent could be a reality, especially in light of the rising energy prices. Bond yields broke the last psychological mark of 2 percent after the recent inflation numbers, which were terrible, and further escalation could make the bond yields inch upwards.

Even though the recent Fed minutes have been relatively dovish and the Russia-Ukraine tensions have led to flight towards safe-haven assets, eased long-term yields.

Do you think the LIC IPO would be a blockbuster? And, do you see any correction in the market that it may trigger, or, will it keep the market volatile?

Also read - LIC IPO | 5-10% discount will make it attractive for policyholders: ithought Financial's Shyam Sekhar

The LIC public issue is already a huge event in the markets. LIC would become one of the top three companies by market capitalisation soon after the IPO and would get passive flows and eventual inclusion in the benchmark indices. And still, the valuation for LIC seems relatively conservative. I expect the LIC IPO to sail through with ample subscriptions from domestic and foreign investors if the global uncertainty doesn't escalate.

An IPO of this size might cause a liquidity crunch in the domestic market but might also bring in foreign inflows into the market. However, we cannot rule out the IPO causing volatility or even a correction in the secondary market.

Also read - Here are four side trading opportunities during the LIC IPO

Given the preference for growth, do you expect the RBI to keep the key policy repo rate at 4 percent in 2022?

The RBI has made clear its intention to boost growth, but India's long-term yields have also escalated like the global peers. India lags behind its global peers in terms of growth after the pandemic, and our priority should be to bridge this gap. I believe that the RBI will continue to remain dovish until inflation is triggered by rising crude and commodity prices start playing spoilsport.

Is it the time to invest in banking and infrastructure segments?

Banking and infrastructure growth are the next big themes. Bank stocks typically flourish in a rising interest rate environment like we are entering now. On the other hand, infrastructure stocks have been given the biggest priority in the Union Budget. So markets this year might not reward every sector like the last year. Still, the banking sector, which is showing fundamental strength and offshoots of growth, and the infrastructure sector, which is getting the critical priority, might be two of the sectors which lead on the positive side this year.

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