It has been seen that higher rates typically occur in a high-growth environment. Therefore, stock prices can still go up as underlying earnings growth outpaces the decline in multiples, says Rajesh Bhatia, Managing Director & CIO, ITI Long-Short Equity Fund, in an interview with Mint Genie.
Why are 10-year bond yields rising? How should an equity investor read it?
Bond yields initially rose on higher-than-expected government borrowing in FY23 in the Union Budget, and are now on the back of rising inflationary pressures (oil and commodity price increase with the Russia-Ukraine war). This has also raised the cost of incremental issuance for the corporate sector.
From an equity investor's point of view, higher rates typically result in lower equity multiples. However, one should also note that higher rates typically occur in a high-growth environment. Therefore, stock prices can still go up as underlying earnings growth outpaces the decline in multiples. Interest rate sensitives sectors could underperform in the coming months.
RBI has indicated that it will go for gradual policy normalisation this year. When can we expect a rate hike; will it begin as early as June or August? Do you expect a knee-jerk reaction in the market?
Even as the broader Indian economy continues to recover from the pandemic dip, the recent spurt in inflationary pressures threatens the progress going forward.
Keeping in mind that most of the current inflationary pressure is supply-led, we expect RBI to opt for growth first strategy for the coming months and maybe look to normalise towards year-end. Higher oil prices or a poor monsoon pose risks to our view.
Foreign flow seems to be slowly coming back to the Indian market. At a time when rating agencies have trimmed India's FY23 growth forecast and Fed seems determined for aggressive rate hikes, what is underpinning FPI inflow?
FPI inflows are an end result of passive India bets (India ETFs or EM ETFs), active bets as well as allocation between various asset classes.
We note here that recent FPI outflows have been mostly triggered by lower allocation to emerging markets and reduced active bets (given India’s dependence on oil and relative outperformance).
On the flip side, we also have global balanced fund strategies transferring money from fixed income to equities, owing to recent underperformance.
Can the auto sector be a contra bet? The sector is reeling under several challenges, what is the medium-term outlook for the sector?
Yes, the auto sector can be a contra bet although stock prices need to correct further. The volumes of the sector are far lower than FY19 across segments. Hence, normalisation of economic activity could lead to a bounce in volume growth snd hence profits of the sector.
What are your views on IT majors TCS and Infosys Q4FY22 numbers? Should one buy/sell/hold these stocks at this juncture?
Ans - The IT sector is facing issues with salary inflation which can impact margins in the next few quarters. But demand is strong enough to aid margins over time. Hence any stock corrections could be an opportunity.