The market has many headwinds at present. While inflation is at a multi-year high, aggressive rate hikes are looming. Jimeet Modi, Founder & CEO, Samco, believes that aggressive rate hikes will hurt demand.
Corporates may also keep their capex plans on hold if demand moderates, which in turn can negatively influence credit off-take, he told Nishant Kumar of MintGenie in an interview.
We are probably going to witness aggressive rate hikes this year. How do you think rate hikes can impact economic growth? Can rate hikes derail economic recovery?
Rate hikes are generally done when growth is buoyant and are directed to contain the growth of the economy. The motive is primarily to control the second-order effects of inflation. This is precisely why recessionary risks emerge when interest rate hikes are undertaken to tame high inflation.
In the Indian context, with food inflation remaining elevated and with a muted increase in the real income of the rural population, it is likely that aggressive rate hikes will hurt demand. Corporates may also keep their capex plans on hold if demand moderates, which in turn can negatively influence credit off-take.
What is in store for us in terms of rate hikes? Will RBI lift rates in June and August too? For how long do you think the rates will be rising?
Given the inflation trajectory, the repo rate has a lot of catching up to do. The governor has already stated that they intend to get the repo rate back to pre-covid levels, indicating that a further hike of about 75 bps is already on cards. If we look at the rest of the world, they have signalled cumulative rate hikes of about 2-2.5 percent.
So for parity, our repo needs to be somewhere between 6-6.5 percent, thus requiring additional rate hikes of about 200 bps over the next 12 to 18 months. Therefore, for the June meeting, it is likely that the repo will be hiked by another 25 bps at the minimum.
What could change the market sentiment? At the beginning of this year, we were expecting Nifty to be around 19k by the end of the year. Is 19k a distant dream for Nifty now?
A quick de-escalation of the war, easing of supply chains in China and a faster than anticipated easing of inflation are what can turn the tide.
Inflation worries need to shift to fear of deflation, making it imperative for central banks to pause rate hikes. This will change the market sentiment and we may see a good uptrend then.
Having said this, in the short term we do expect more downside from here because it will take some time for inflation to cool down even if the war and China situation improves.
This year is going to be a tough one to navigate and with the fast evolving global macros, at this juncture, it is a futile exercise to predict at what level Nifty will end the year.
What are your views on consumer stocks? Can consumer stocks be contra bet at this juncture as they may benefit when inflation starts ebbing?
Consumer stocks are a great secular long-term play and are certainly good buying opportunities but not from a short-term perspective. These companies will continue to face margin pressures and upsides will be limited in the short term due to stagflation concerns.
However, if one has a slightly longer horizon, then it is only a matter of time before these companies get back to their average margin levels.
From a long-term perspective, therefore, the best time to buy these stocks is when they face inflationary pressures. So while generally, this space is a good place to be, one does need to be selective and careful while choosing which stock to invest in.
When does recovery start in the market, and which sectors will be the leaders? Will the economy-centric stocks be among the top gainers? Will IT and financials see their shine fading?
Tech, financials, and consumption are broader themes that will continue to do well over the next decade. Specifically for the IT sector, the underlying demand has continued to be strong and the management commentaries were largely positive.
Supply side pressures for them are also expected to ease and risk reward for a lot of the IT names is becoming favourable.
Among the larger consumption story, we believe that consumer durables, home improvement, building material, and FMCG will do well. The margins of these sectors will catch up and with inflation easing, demand as well will be back.
What is your advice for a regular, moderate risk-taker investor? Should they stick to only defensive bets? Where would you place your bets?
Markets are facing multiple headwinds and it is going to be a turbulent phase. Investors should therefore have a three-to-five year view because investors with a short-term horizon in such markets face risks of significant drawdowns. In turbulent times, even defensives will fall, so there is no place to hide.
Investors should study and pick strategies that work for them and accordingly place their bets. They should be patient and should not skip and hop between strategies in such bad times.
Leverage should be avoided at all costs and instead of trying to bottom fish, investors can let the storm pass. This year is going to be a difficult one to make money and so protection of capital is equally important.
Disclaimer: The views and recommendations made above are of the analyst and not of MintGenie.