After a second consecutive rate hike by the RBI MPC in the June Monetary policy, R Amarnath, Head - PMS, Ventura Securities sees another 25 bps hike in the upcoming August policy. In an interview with MintGenie, he advised new investors that if investing directly, go for a tactical allocation shift from trading to Buy-Hold with a 2-year perspective. The volatility is providing several opportunities to capitalise, at reasonable valuations, said Amarnath. He is overweight on high pedigree companies in Banking, IT, Engineering, Chemicals, and Textiles with FMCG as a contrarian pick. Edited Excerpts.
What is your reaction to the June monetary policy review?
Less is said in the numbers and more in English. While most central banks have taken off their velvet gloves to unabashedly tackle inflation, RBI still prefers to play it by the ear. The implicit assumption is for a calibrated soft landing by Q3FY23. Just a day before the policy, the World Bank Global Economic Prospects report downgraded global 2022 growth sharply to 2.9 percent (from 4.1 percent forecast in January) and India’s FY23 to 7.5 percent (from 8 percent) while RBI is unchanged at 7.2 percent.
Other key pointers causing some dissonance are i) FY23 inflation expectation now anchored at 6.7 percent (up by 100 bps ) and ii) the forecast of 4QFY23 GDP at 4 percent (almost the same as 4QFY22).
What would you advise new investors in this rate hike environment?
For investors who started dabbling in equities from 2020, they need to embrace certain core principles such as keeping the faith (do not abandon SIPs) and if investing directly, go for a tactical allocation shift from trading to Buy-Hold with a 2-year perspective. The volatility is providing several opportunities to capitalise, at reasonable valuations. Further, in the VUCA (volatility, uncertainty, complexity, and ambiguity) environment we are in, the credit metrics of companies need as much scrutiny as equity parameters.
Do you think the rise in interest rate will lead to a decline in demand for the real estate sector?
One needs to look at the combo of rates and capital values of a residential unit together with the affordability factor. Hence, on a holistic basis, the home buyer is still on a fairly good wicket.
How do you think the rate hike will impact the banking and financial space?
Definitely some impact, particularly on the liabilities side, shall percolate over the next 3-6 months but one should desist from painting all financial players with the same brush. The BFSI sector could arguably see yet another segregation of men and boys over the next couple of years with fintech as a core pivot.
Which sector are you bullish on currently and which sectors do you advise investors to avoid?
To paraphrase Charlie Munger of BH the state of the present market calls for “not seeking action for its own sake but instead combining extreme patience with extreme decisiveness." High pedigree companies in Banking, IT, Engineering, Chemicals, and Textiles would be overweight bets with FMCG (at dips to the lower end of the 5-year P/E band) as a contrarian pick. Midcaps curated on a bottom-up basis should find a 25 percent allocation and PSUs (Defence, Railway) at say 5-7 percent.
Do you see any uptrend in the auto space in the near term or will the rate hike slow recovery?
Already, too many moving parts for the Auto industry – tectonic tech shifts, chip supply issues, multiple new entrants (in 2W), and a long waiting list that may have some inbuilt froth. The K-shaped recovery as in 2-wheelers and to some extent in PVs points to sputter in the playout of the income pyramid transformation. Hence, rate hikes could delay the rebound. Select ancillaries including tyres (replacement market as unlock manifests) seem relatively better bets.
What are the key trends investors should look out for in June?
It will be about the Fed Speak n Act on June 15, the progress of the monsoon, and crude prices. On the flow side, the sustenance of SIP and GST collections would be important for market sentiment. Equally pertinent is to monitor stock-specific multiples on a TTM basis (FY23 is a bit too volatile to take the current set of forecasts at face value) to pounce on tempting entry levels.
How much more rate hike do you expect by the end of FY23?
Surely one more, front-ended at 25 bps and thereafter linked to US Fed actions and Kharif harvest outlook, behaviour of crude. An unknown factor is centre-state GST sharing reset or time extension.
Will the upcoming rate hikes lead to a strong market correction or will it be priced in?
The equity markets have grinded lower in the past few months with some sharp declines at a stock-specific level as they digested several unexpected events and consequent politico-economic resets. Barring some cataclysmic twist in the Ukraine war front or another energy shock into the cold season for Europe, corrections are likely to be more modest including in India.