The markets are currently factoring in a 50 bps rate hike in the next week's RBI policy meet, said Nishit Master, Portfolio Manager, Axis Securities PMS. In an interview with MintGenie, Master said that he believes that in the short run, there is some possibility of Indian markets underperforming their developed market peers if there is pressure on the rupee. He advises investors to increase allocation to equities on each fall so that they can reap its fruits in the long term. Edited Excerpts:
RBI Policy is next week. How much rate hike is already factored in by the markets?
We believe with the policy announcement by the US Fed and its impact on Indian interest rates, as well as currency, the markets are currently factoring in a 50 bps rate hike in the next week's RBI policy meet.
What policy or forecast change by the RBI next week could lead the markets into a downward spiral?
With the rupee under pressure, RBI might be forced to turn more hawkish to stem significant rupee depreciation and thus also imported inflation. The current banking system liquidity is already in deficit from surplus earlier, and we believe RBI would not be willing to support INR further by selling dollars in the market. All these factors can lead to a reversal of FPI flows from India as their target is returns measured in dollars, and if the rupee depreciates, there is further pressure on their returns. FPI outflows along with a potential increase in interest rates in India, which also increases the cost of funds, will hurt market multiples in the near term and can lead to greater market volatility.
Considering the Indian markets have been resilient so far, will it be impacted by the US Fed rate hike or will the outperformance continue?
From the near-term perspective, Indian markets could witness increased volatility due to US Fed rate hikes and corresponding INR weakness. But if one looks at the Indian markets from a medium and long-term perspective, then India remains the fastest growing major economy in the world. In a scenario where the US, Europe, China, and Japan are either slowing down or entering a recession, investors will look at India favorably as it is one of the few markets where there is growth. Thus we believe that from a medium and long-term perspective, Indian markers should outperform their global peers.
Do you see the Indian market's uptrend vs global peers ending shortly? What could cause that?
We believe that in the short run, there is some possibility of Indian markets underperforming their developed market peers if there is pressure on the rupee due to the dollar appreciating buy in the medium to long term. We believe that Indian markets will continue to outperform due to higher growth rates in the Indian economy.
Do you see a major correction in the Indian markets before Diwali or with it continuing on its current pattern?
We believe the Indian equity markets might see increased volatility in the near term but should still trade in a broad range of 16,500 to 18,500 for the Nifty.
Most experts are suggesting either a ‘wait and watch’ or 'buy on dips' strategy for new investors. What would you advise?
We continue to believe that in the medium to long term, Indian markets have tremendous potential to create wealth for investors. While in the short run, markets might be a little volatile due to external factors like global liquidity tightening and poor growth in developed economies. In such a scenario, we would advise investors to increase allocation to equities on each fall so that they can reap its fruits in the long term.
What themes are you looking to bet at for the festive season starting soon?
For the festive season, we like consumer discretionary themes like consumer durables, retail, auto, and hospitality sector. Another sector on which we are very bullish is Banks, which also is a proxy for the overall economic growth of the country.
What is the outlook on consumer durables or retail names? Do you see an increase in demand and will that lead to outperformance?
In our opinion, the current festive season should be strong, especially in urban areas. We would want to play this through consumer durables/kitchen appliances and retail names like TTK Prestige and ABFRL. We believe these sectors have the potential to outperform broader markets in the near term.
Do you think the recent correction in IT companies makes them a good bet to accumulate or are there more fundamental issues to consider?
The recent correction in IT companies has led to valuations coming down to reasonable levels, but the concerns on demand due to economic slowdown/recession in the developed markets of the US and Europe is for real. One can wait for some more correction in the sector before increasing allocation.
PMS' has not performed very well recently. Do you believe they are a good strategy for investors who acquired recent windfalls?
Is it important for individuals with limited time or expertise to outsource their investment needs to professionals? In this regard, PMS plays a significant role. It is critical to understand the investment philosophy of the PMS fund manager and the methodology used by the fund manager to build a portfolio before investing in a particular PMS. It is not completely true that PMS has not performed well recently. For instance, if you look at our performance, you would realize that PMS is performing well. Our strategies Axis Securities Pure Growth and Axis Securities Pure Contra portfolios have done exceedingly well in the current environment. We have generated significant alpha after factoring costs for our clients while minimizing drawdown during volatile markets.