Moneycontrol Market Sentiment Survey | Fund managers see inflation as biggest risk, expect oil prices to soften

Six out of the 11 fund managers polled saw the sharp acceleration price increase across the world undermining the stock market in 2022 given that it could trigger an aggressive response from global central banks to tame inflation.

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In the US, the US Federal Reserve has already pivoted itself towards aggressive increase in interest rate as it looks to bring down multi-decade high inflation in the world’s largest economy. Traders are currently pricing in more than seven rate hikes in 2022 with likelihood of a 50 basis points hike at the upcoming June meeting seen as a near certainty.

The Federal Reserve raised interest rates by 25 basis points in March, a first in four years, despite the volatility in the global markets caused by Russia’s invasion of Ukraine.

At home, the Reserve Bank of India has been forced to move inflation above growth in its sequence of priorities after forecasting that inflation will average 5.7 percent in 2022-23, which is precariously close to the upper band of its inflation targeting model of 2-6 percent.

Besides inflation, some fund managers suggested that downgrade to earnings estimates for Nifty 50 companies could be a major risk for investors given the squeeze in margins of companies caused by surging input prices.

That said, most fund managers retained their expectations for earnings growth of Nifty 50 companies. Eight out of 11 asset managers expect earnings to grow by 10-15 percent in 2022-23, a view that was retained from the March edition of the Moneycontrol Market Sentiment Survey.

While the surge in global crude oil prices beyond the $100 per barrel mark over the past month has been one of the chief reasons for rising fears over inflation, majority of the surveyed fund managers do not expect average Brent crude oil prices to be higher than $85 per barrel. Brent futures of crude oil were currently trading at around $108 per barrel.

Where fund managers see comfort for the widening current account deficit of India from softening of crude oil prices later in the year, they see problems from the continued weakness in the currency. An overwhelming majority of fund managers surveyed expect another 2-4 percent depreciation in the rupee against the US dollar from current levels.

Given the turbulence in the market over the past six weeks, fund managers largely refrained from raising cash levels in their portfolio. Moreover, most recommended that investors park 60 percent of their portfolio in equity funds, around 30 percent in bonds and 10 percent in gold to tide through the current market volatility.

Asset managers also believe that financial services and information technology sectors will remain the preferred picks to ring-fence the portfolio from the spike in market volatility even though both the sectors have seen incessant selling from foreign portfolio investors in recent times.

The Nifty IT index has fallen more than 11 percent so far in April while the Nifty Bank index has largely remained flat in the same period. Some fund managers also recommended pharmaceuticals, retail and utilities companies as sectors to invest in current volatility.