By Manish Jain
The Fed has been super aggressive in tightening in the last few months with a single-minded focus on bringing inflation under control even if it meant slowing the economy down a little. Never before in recent history has the tightening cycle been so aggressive, with four 75bps consecutive rate hikes in a matter of fewer than 6 months.
The issue for emerging markets like India was that the RBI was forced, in order to defend the currency, to match every Fed hike point to point. After a substantial depletion of the forex reserve, hiking rates were pretty much the only weapon in the arsenal. The biggest impact of this tightening cycle was the flows, especially FII/FPI have not only seen a substantial outflow but also have remained volatile. The biggest fear, and quite justifiably, was that the economy and consequently the equity markets would reach a tipping point.
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However, in the last policy meeting, minutes suggested that the pace of tightening is likely to ease a little going forward. Instead of 75bps, the market is now expecting a 50bps hike going forward. This is good news. The key question that now remains is, is this the end of the tightening cycle, and if yes, what will be the impact of the same on the markets? Looking at things from India’s perspective, we do believe that the end of the cycle is near. The inflation footprint at 6.8% has eased substantially and will likely ease further largely due to the falling price. The repo rate is already at 5.9% which means the gap is a very manageable 80bps which should shrink to 30bps by January (assuming a further softening in inflation and a 25bps tightening). This is a clear signal that the tightening cycle in India has already seen the worst and things are likely to improve going forward.
Now that we have managed to clear that up, when you look at the fundamentals of the economy, they are on a very strong footing. India is likely to register a 6%+ GDP growth rate and double-digit earnings growth in FY23-24E. We are and will likely remain the fastest-growing economy for some time to come. So, we remain optimistic about the growth prospects of the equity markets for CY23 and believe that Indian markets should do well and FPI/FII flows should come back strongly.
Sectors to watch out for would be – IT, banks, Auto and consumer discretionary. IT valuations have come off substantially, attrition issues are now behind, margin pressure should ease and as the US economy stabilizes, growth prospects should also improve. Banks are a play in strong credit growth and best-ever asset quality. The auto and discretionary cycle is going to last for some time to come.
So, go ahead and invest in great businesses but remember, buy only good & clean companies. Happy investing!
(Manish Jain, Fund Manager, Coffee Can PMS, Ambit Asset Management. Views are author’s own.)