The Indian market may be sideways to negative for the year, says Sidhartha Bhaiya, Managing Director of Aequitas. In an interview with MintGenie, he said there would be certain pockets of the economy that will do well but also, specific segments where the valuations still have a long way to correct.
Edited excerpts:
In a recent tweet, you have said that this is going to be a lost decade for many. You wrote people invest in stocks because they earn some 4% in fixed income and now after the stock is down 50%, they move back to fixed income and earn back that 50% over the next 10 years. Can you please explain it further to us?
In the last decade, we have seen an extremely low-interest-rate environment which drove down the cost of capital and led to expansion in PE multiples for numerous stocks. Moreover, the lack of yields on fixed-income instruments has forced many retail and first-time investors, traditionally low-risk investors, to invest in the stock markets at frothy valuations.
We have seen record retail inflows into the stock markets by many first-time investors who probably don’t understand the risks associated with the stock markets. Nearly 1 out of 4 stocks in the BSE 500 has already lost more than 50%, and the bear market has begun in some sectors.
As interest rates rise, the cost of capital will increase, and the stock froth will correct even more. Higher interest rates on fixed deposits and losses on equity portfolios will again lead to rebalancing.
Most people will slowly bite the bullet and return to fixed-income investments. It has happened in the past (Morgan Stanley growth fund, 1994), and we have no reason to believe that there is a secular change in the behaviour of the retail investor.
Only time will tell whether the Indian retail investor has matured or were the current flows into the stock markets result from a lack of returns in fixed deposits and FOMO driven by their neighbours making money!
How do you see the rate hikes by the central banks globally? Inflation is soaring and central banks do not have many choices left. After a 75 bps hike by the US Fed, what do you expect from the RBI?
The global bond markets have been in a 35-year bull market, and interest rates have been close to zero in the developed world for more than a decade.
While the Fed has hiked interest rates by 75 bps, the FED fund rate is still only at 1.75%. The central banks are way behind the curve, and given that global inflation is still hot, we have seen more rate hikes by central banks in the future. Given FPI outflows and what is happening with our neighbours
(Sri Lanka, Pakistan, Nepal), we expect RBI to be aggressive with rate hikes going forward to calm down inflation and protect the Rupee.
Rate hikes are bad for the economy and will impact the government capex also since the government is probably the biggest borrower and will be forced to pay high interests. To what extent rate hikes can affect economic growth?
Rate hikes are bad for the economy but what’s worse for the economy is inflation. Inflation going out of hand can have serious long-term repercussions for any country. In our view, substantial tax collection revenues will somewhat negate the rise in interest outgo for the government. So if tax collections remain high, then we don’t see a significant dent in government capex.
What is your expectation from the domestic market this year? Do you think India will remain among the top-performing emerging markets in 2022?
We expect the Indian market to be sideways to negative for the year. There will be certain pockets of the economy that will do well but also specific segments where the valuations still have a long way to correct.
What sectors are you looking at for investments now? Should we go for defensives now as the market outlook is hazy? Should we go for dividend-yielding stocks?
From a market outlook perspective, I am not very confident in many sectors represented very heavily on the benchmark, primarily due to their valuations.
We are getting into some sticky inflationary times where traditional “defensive sectors” like consumption are feeling the input price pressure heat, their all-time high valuations notwithstanding.
The same is the case with IT, where their employee costs have gone through the roof along with “back to the office” as the clarion call; prices are increasing sharply.
Not taking into account the software's new business acquisition, which has softened. Banking, too, I believe, will have its own set of challenges – we have just been selling “Retail Loans” for the past ten years –this is the first inflationary severe bout that households will see – we may have delinquency challenges at the margin which can make banks tighten credit – which can impact fresh disbursements.
All of the above would have been fine and ridden off, except these sectors are priced to perfection and may see a time correction if not a price correction.
I believe we are getting into a time where we will see a significant Sector rotation where the erstwhile winners will cede way for new sectoral winners.
We at Aequitas believe that infrastructure (short-end capex), metals, commodities, automobile, pharma and B2B manufacturing companies will do well in the coming days and have positioned our portfolio accordingly.
Disclaimer: The views and recommendations made above are those of the analyst and not of MintGenie.
