Global debt-to-GDP is at an all-time high and thereby sensitivity to higher interest rates is even higher. The recent bout of extreme volatility in UK bonds and currency may serve as an eye-opener for policymakers to adopt a more patient approach to tackling inflation, said Kunal Valia, Chief Investment Officer – Listed Investments, Waterfield Advisors. In an interview with MintGenie, he shared his views on markets and the economy.
Edited excerpts:
The talks of rate hikes have been on the table for quite some time now, but every time the Fed says something, the market falls. Why has the market not been able to discount rate hikes yet?
Equity Markets are at the crossroads of high inflation, accelerated pace of rate hikes by global central banks and slowing economy and rising risk premia.
We believe a large part of the rate hikes are behind us and soon the monetary policymakers may take a measured approach towards identifying the impact of past rate hikes on an overleveraged global landscape.
Global debt-to-GDP is at an all-time high and thereby sensitivity to higher interest rates is even higher.
The recent bout of extreme volatility in UK bonds and currency may serve as an eye-opener for policymakers to adopt a more patient approach to tackling inflation.
We expect the Federal Reserve, ECB and RBI to keep raising rates to bring down inflation although at a measured pace over the next few months and thereafter growth versus Inflation dynamics will take the centre stage.
However, what will be different compared to the last 12 years is a change in risk premiums as interest rates are no more negative or zero.
The higher cost of capital impacts the government, businesses, consumers as well as earnings and re-defines “equity risk premium” for preferring equity over bonds
Indian Equities and bond markets have been resilient in this global storm whereas US Equities and bonds have seen a drawdown of 25% and 20% respectively.
The extent of losses in developed market bonds in 2022 has not been seen for decades.
We expect India to do relatively well, however, the decoupling idea seems farfetched.
Is the risk of recession to the IT sector overblown? What should be our strategy for the sector?
Technology is one sector where large corrections have taken place since October last year.
We think that the sector is undergoing valuation re-rating because the sector was overvalued from the time the pandemic began as people increased their usage of technology and digital tools in a manner which we have never seen before.
A huge valuation re-rating has taken place between March 2020 and October 2021.
However, since October 2021, we have seen a bit of demand subsiding for the technology sector leading to margin compression during rising manpower costs.
Having said that, since a lot of IT stocks in Nasdaq and Indian IT stocks have witnessed a correction of 25-40 percent, the sector offers a good accumulation opportunity in the next six months.
What is boosting the banking sector? What is the road ahead for it?
After a gap of a few years, we are witnessing a surge in credit growth coupled with lower non-performing assets, both parameters augur well for the growth of the sector. The interest rate hikes further add to margins.
However, the noteworthy point is that the share prices of many large private sector banks have been underperforming for the last few years and may rebound given the credit growth.
Everybody is saying this is India's decade. What are the major challenges that can spoil the party?
The India story has always been on the right path, however, this time the economic growth is gaining better momentum and is placed to be the fastest-growing large country over the next few years.
Tax collections, rising home sales, capex, auto sales and several other parameters are showing a strong uptick. The two big challenges we face are a high trade deficit due to higher imports and slowing exports and a high fiscal deficit.
What is your view on the rupee? Can we see the rupee beyond 85 a year down the line?
The strong economic momentum in India makes it an attractive destination for foreign flows both FPI and FDI. However, the drastic shift in interest rates in the developed markets is leading to outflows from most emerging markets including India.
The safe-haven flows to the US have led to a sharp surge in the dollar index since 2021 and are likely to continue till the time inflation slows.
India further faces an upsurge in the current account deficit and is likely to grow above 3% for FY23. The twin deficits coupled with volatile global markets can add more pressure on the rupee. However, we believe the worst is behind us.
What sectors are you investing in at this juncture? Why are you positive about them?
Given the volatility in global markets and the fact that inflation in developed nations is far from the targets, it will be best advised to focus on a diversified portfolio with a higher allocation to sectors, and companies that generate revenue from domestic markets. However, it may be a good time to consider export-driven sectors like IT and pharma given the price correction.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.
