Gaurav Dua, SVP Head of Capital Market Strategy at Sharekhan by BNP Paribas, expects at least one more rate hike in the April credit policy after the Reserve Bank of India (RBI) raised the repo rate by 25 basis points (bps) in the February monetary policy. This is the sixth straight rate hike by the MPC.
In an interview with MintGenie, Dua advised investors to increase exposure to dynamic bond funds or duration funds where in the next 1-2 years, the average returns could be in double-digit due to rising portfolio yields along with the possibility of appreciation in bond prices driven by the peaking out of rate hike cycle.
Going ahead, he expects Nifty to consolidate in the narrow range of 400-500 points for the next few weeks if not a month or so.
Edited excerpts:
What are your views about the February RBI policy announcement?
A rate hike of 25 bps is in line with consensus expectations. However, the commentary was on the hawkish side. Contrary to market expectations, RBI did retain its monetary stance of “withdrawal of accommodation” instead of changing it to “neutral” in its first credit policy of 2023. Barring this minor disappointment, the credit policy is quite satisfactory on an overall basis.
The RBI MPC hiked the repo rate by 25 bps to 6.5% on the expected line, however, it left the door open for more hikes on the back of sticky inflation. How long do you think the rate hike cycle will continue?
RBI and the MPC members seem to be worried about the stickiness in core inflation. No wonder, the RBI governor mentioned core inflation five times in his speech. The MPC stated that the headline inflation has been rising well above the upper band of the tolerance level and could remain at an elevated level, excluding vegetable prices that have moderated due to seasonal factors rather than any interest rate hike-led easing of demand. Hence, the RBI governor indicated that the rate hike cycle could continue till there is meaningful moderation in core inflation or a slowdown in economic growth. Consequently, we expect at least one more rate hike in the April credit policy also.
By when do you think inflation will come under control?
As indicated by MPC, the recent moderation in retail inflation could be due to seasonal factors and the core inflation continues to remain at an elevated level despite the aggressive interest rate hike. The opening up of China and the recent firming up of energy prices also seem to be the reason for stickiness in the core inflation. Normally, the rate hikes have a lagged effect on consumer demand and economic growth which, in turn, leads to moderation in inflationary pressure. Consequently, RBI has projected the average inflation level to be moderately meaningful by the second half of the next fiscal i.e. FY2024.
What about the markets? With earnings almost in line, and RBI hiking the repo rate as expected, what will it focus on next?
Equity markets have taken the credit policy in its stride since the announcement of a rate hike is largely in line with expectations. With the Q3 earning season also coming to an end, the global cues would play an important role in the near-term direction of the markets. We expect Nifty to consolidate in the narrow range of 400-500 points for the next few weeks if not a month or so.
How do you see the markets performing in the first 6 months of 2023?
Markets are likely to remain range-bound in the first half of 2023 as the positives could get nullified by the global uncertainties and the effect of readjustment in allocation by foreign investors in favour of China as compared to other emerging markets including India.
Where do you stand on broader markets? Buy or reduce? What factors should one look at to decide?
Post the recent correction, the valuations have turned attractive. Nifty trades at around 18x FY2024 consensus earnings estimates which is largely in line with long-term average valuation multiples. As an investor, one should look at current volatility to accumulate quality stocks available at prices that are 15% to 25% lower than their 52-week high level. One needs to keep in mind the big picture of a multi-year upcycle in the Indian economy and the potential upside in equities over the next 2-5 years.
Which sectors would you advise investors to stay away from?
Rather than sectors, we would advise investors to avoid expensive stocks that can suffer from de-rating of valuation multiples in a current tough macro environment and global uncertainties. Accordingly, in addition to individual stocks with rich valuations, we are cautious on sectors like consumer staples, insurance and global commodity-driven businesses.
Growth or value? Which would you suggest amid this uncertain environment?
We believe that one needs to follow a balanced portfolio strategy with a healthy mix of sector allocation along with stock picks based on diverse investing styles and/or market breadth in terms of largecap/midcap/smallcap exposure.
With the rate hike cycle likely to continue, would you advise investors to make portfolio changes, shifting towards debt instruments or safe havens like gold?
Allocation mix across asset class is not only a function of view on the market but also the financial goals and risk appetite of an investor. Having said this, we revised our strategy for the fixed-income segment last month. We have been advising increasing exposure to dynamic bond funds or duration funds where the next 1-2 years the average returns could be double-digit due to rising portfolio yields along with the possibility of appreciation in bond prices driven by the peaking out of the rate hike cycle.
One key piece of advice for new investors?
Many new entrants for the first time are experiencing a long phase of market volatility where returns can be muted or even negative. Also, it is only in tough times that the importance of fundamentals comes to the fore. That’s because the damage in speculative and momentum stocks with weak fundamentals can be severe during the volatile phase. Thus, we have been advising retail investors to avoid such mistakes in the future and look at building a quality investment portfolio and following a disciplined trading strategy. Accordingly, we have identified a few high-quality stocks from the three investment themes namely Capex, Credit and Consumption that can be accumulated in the current volatile phase. Additionally, we also offer eight stock baskets to help investors in their investment journey of building a portfolio, actively tracking the stocks in the portfolio and also prompting them to take timely action whenever required.
