In a tough situation like the present, overweight on largecaps and underweight on smallcaps strategy should help capture meaningful upside while insulating against heavy downsides in the near term, says Nirav Karkera – Head Research- Fisdom. In an interview with MintGenie, Karkera discusses the top triggers for the market also and how one should navigate in such times.
Edited excerpts:
What are your views on the rate hikes? Considering the magnitude of the hike and the possibility of further rate hikes, can we say it can derail economic recovery?
Frontloading the rate hike through the 40bps off-cycle rate hike last month followed by the recent 50 bps rate hike creates a perception of the RBI scurrying to catch up with the curve.
While the off-cycle hike dented sentiments across capital markets, the recent increase has been well received by most economic participants. Exclusion of the CRR during the latest announcement offered respite as the central bank seeks to maintain systemic liquidity offering meaningful headroom to service potential credit offtake.
Though the hikes so far can be expected to be early ones in a longer cycle as inflation woes are expected to persist for longer. The central bank faces the classic trilemma where the decision to rein in inflation will come along with the banes associated with higher interest rates and declining currency strength.
It is worth noting that the current inflationary situation is a fallout of supply distortions and a liquidity tightening regime in isolation when demand dynamics are as sluggish as it already is, it does push the economy into a slowdown.
The best way to counteract the perils of such a slowdown includes the effective implementation of thoughtful fiscal measures.
The government has been efficiently complementing the monetary measures with effective fiscal measures pertinent to commodities and international trade. The anticipated series of rate hikes can be expected to defer, but not derail India's economic growth prospects.
What are the top triggers for the market at this juncture? The Ukraine war still looks far from getting over. What impact could a prolonged war have on the Indian market?
The largest economic impact of a prolonged Russia-Ukraine war will be persistent distortion in the supply chain escalated by further economic sanctions, leading to sustained inflation led by elevated commodity prices.
The immediate fallout of such a situation could potentially trigger a global economic slowdown and, in extreme cases, push the world economy to the brink of recession. Any alleviation of expected adversity would rely on strong political and diplomatic intervention.
The top triggers for the market would include developments around the Russia-Ukraine war, the US Fed’s actions as it attempts to strike a balance between raging inflation and tepid economic growth, commodity prices especially that of crude oil and the degree of demand robustness.
Banking and IT sectors have been buzzing of late. Some analysts have started saying banking stocks can offer much better returns than IT stocks in the medium term. What is your view on it?
RBI's exclusion of CRR in the recent monetary policy announcement has warranted cheer by banking institutions benefitting from maintained systemic liquidity as hopes fly high on the subject of healthy credit demand Q2FY23 onwards.
Rate hikes have been transmitting rather efficiently to most loans and advances by virtue of being repo-linked while it takes longer for the same to be fully transmitted into rates offered on deposits. Bank balance sheets are currently at peak health levels as the industry makes significant progress on NPA cleanups.
The banking industry offers strong earning expansion prospects over the medium term. In the near term, risks of a global slowdown and talent attrition are expected to exert pressure on margins.
However, with the macro-economic led displacement expected to shake up the IT talent pool, one can expect the talent attrition problem resolve over the next couple of quarters.
The slightest turnaround in the global economic situation while in the face of a global slowdown can be expected to spur a renewed demand for cloud and digital service technologies.
For IT companies with exposure to the export of software and allied services, the depreciating rupee could prove to be a meaningful tailwind. Both, banking and IT, offer strong growth prospects for select participants in the industry.
What is your outlook for the Indian rupee? The domestic unit is down about 5 percent this year so far. Where do you see the currency in the next one year?
The Indian Rupee's landslide has gained momentum, especially since the commencement of the Russia-Ukraine war on account of its impact on international trade and inflation, especially that of commodities like crude.
In line, India's trade deficit has widened to a record $23.3 bn in May 2022. With no respite from the geopolitical situation on the horizon, one can expect the fallouts to persist for longer.
The pressure on INR is only further accentuated by accelerated and large-quantum reversal of easy monetary conditions across developed economies.
A culmination of these factors along with a risk-off environment triggering reverse migration of capital out of Indian capital markets weigh heavy on the strength of INR against the greenback. Though RBI has been intervening to arrest the slide in the domestic currency, there is only so much that it can do.
While RBI's forex reserves are at a reasonably healthy level at nearly $601 billion, the pace of reduction, fiscal prudence and prospective need to preserve restrict RBI's ability to intervene aggressively. A decline in the domestic currency is as much attributable to a stronger dollar index as much as it is to domestic macroeconomic challenges.
Though the near-term outlook on the currency is that volatility will remain heightened but consolidate within an expectedly narrow range of 77.7 to 78.0 with most challenges being baked into the prices already and a bullish bias suggesting any positive development on key factors can strengthen the currency significantly beyond the range.
When the economy is slowing, rates are rising and inflation is soaring, it is tough to invest in equities. How should you the equity investment strategy at this juncture?
At the outset, now would be a good time to rebalance strategic portfolios and align them with target assets and sub-asset allocations.
Within the tactical portfolio, it would help to steer towards strong value opportunities presented by way of fundamentally strong businesses wherein the share prices are bearing a brunt of mass selloffs without a commensurate change in fundamentals warranting the same.
While the going gets tough, overweight on largecaps and underweight on smallcaps strategy should help capture meaningful upside while insulating against heavy downsides in the near term.
Macroeconomics-induced displacements sure do shake things up but also bring to the fore some brilliant opportunities in select pockets, identifiable at a security level.
For those willing to the mutual fund route, invest in mutual funds reflecting strong fundamentals, frameworks and practices, a systematic investment or transfer plan should augur well for the overall portfolio.
Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.
