Short call | Why markets shouldn't be too excited about Fed rate cuts; Tata Power, Coforge, Inox Wind in focus

The last US inflation print came in at a 3-month low of 2.9 percent in July.

Although concerns over lofty valuations have been lingering for quite some time now, bulls seem to ignore, dismiss, and stomp over it, keeping markets pumped in green. Now, the focus is on the next potential booster: the US Federal Reserve's rate cut path.

Markets will squarely be focused on the US inflation reading due tonight, that is expected to show a moderation in headline inflation closer to Fed's 2 percent target. The last inflation print came in at a 3-year low of 2.9 percent in July. If the August inflation print is favourable, it will amp up Fed's armor to begin rate cut cycle from this September meeting onwards. Swap markets already seem convinced, pricing in about 71 percent chance of a 25 basis point rate cut by next week and about 100 bps reduction by the end of this year.

On the surface, this all sounds positive, as lower rates when they finally happen are expected to further fuel the market euphoria, given the inverse relationship between equities and interest rates. However, there’s a looming threat brewing in the East, in Japan.

If the Fed starts cutting rates and the Bank of Japan continued its rate hikes, the dollar could weaken while the yen would strengthen. Since July, the yen has already strengthened about 12 percent against the US dollar and net long positions (when investors bet that the asset value will rise) on yen have also hit the highest in over 3 years. This can easily prompt Japanese investors to sell off their US assets, chasing better returns in a stronger yen.

We have seen the trailer before. The early August sell-off was driven by the unwinding of yen carry trades, and experts at the time estimated only half of those positions had been closed. If the Fed’s cuts accelerate the process, what seems like good news for the markets now could easily trigger a new wave of unwinds, leading to a repeat – or even escalation – of the turmoil. What looks like a short-term win might just be setting the stage for a longer-term risk.

Tata Power (Rs 445, +6.55%)

Shares surged after the company commenced production of solar cells at Tirunelveli plant.

Bull case: Robust orderbook and increased traction in rooftop solar installation applications under the Pradhan Mantri Surya Ghar Yojna to help the company become market leader in the space, writes Elara Capital. Also stands to benefit from power transmission capex, power distribution reforms and green investments.

Bear case: Delays in execution and lower-than-anticipated growth in demand may drag margins due to a planned capex of Rs 20,000 crore in FY25.

Coforge (Rs 6,799.95, +4.8%)

Motilal Oswal upgraded the stock to 'Buy', indicating an upside of 25 percent.

Bull Case: Company is well-positioned to capitalise on synergies from its acquisition of Cigniti. A healthy growth in its executable order book bodes well for the company's core business, said Motilal Oswal. Company's focus on enhancing operational efficiency, particularly in lower-margin segments like AdvantageGo, is projected to further improve margins.

Bear Case: Revenue growth is expected to moderate in FY25 due to two main reasons - a) drop in new deal TCV, as the FY24 boost came mainly from large renewals b) a general slowdown across key sectors and services, said Kotak Securities.

Inox Wind (Rs 241.05, +3%)

Stock surges to fresh record high as Axis Securities reaffirms 'buy' rating

Bull Case: Company’s strategic equity raise for Resco Global, synergies from demerging substation assets, and expanding into hybrid renewable energy services, coupled with robust growth in wind energy demand, position it to significantly boost EBITDA and PAT. Its market position, advanced turbines, high-margin O&M services, and growing demand position it for sustainable, long-term growth.

Bear Case: The company faces risks from potential delays in ramping up execution and project completion, which could hamper revenue growth. Additionally, under-subscription or delays in wind turbine auctions could slow market demand, impacting future orders and profitability. Execution delays, limited PLF sites, competition, and potential policy changes could hinder growth and profitability trajectory.

(with inputs from Vaibhavi, Neeshita, and Harshita)