By Manish Jain
It seems globally, inflation has started to peak. The delayed effect of an unprecedented tightening cycle by The Fed has now started to become visible in both the economy and inflation alike. In the US, jobless claims have started to rise and inflation has started to correct. In India too, thanks to a sharp 190bps rate hike by the Reserve bank of India, the Consumer Price Index (CPI) fell from 7.4% to 6.7% quite sharply.
Now, the gap between repo and inflation (real policy rate) is a small 80-90bps. We believe that the worst of the tightening cycle is now behind us. The first phase will see the pace of rate hikes slowing from 50bps to 25-35bps before slowing further. We believe that the peak rate should be around 6.5%, followed by a longish pause.
This is good news from an equity markets perspective. Essentially, the end of the tightening cycle signals the end of macroeconomic concerns. We would incrementally expect a more stable INR (against the US$), the current account deficit situation to stabilize and eventually exports to pick up. The recent sharp correction in crude prices (now below $90/barrel, down ~8% in the last month) should further ease inflationary pressures, improving the outlook on fiscal deficit, thus improving the government spending power. More importantly, it will help bring inflation into the RBI tolerance band.
We believe that 2022 has been a year of sector rotation where all the favourites of 2021 (IT Services, Real Estate, Media, Metals etc.) have become laggards and value play has set in, thus pushing PSU banks to new highs. Typically, when the going gets tough, the value orientation of the market comes out. However, this pattern should reverse in 2023 and growth orientation should come back in a big way and quality companies shall witness strong returns.
We would expect Nifty earnings growth to accelerate from 11-12% in the current fiscal to ~15% next year aided by strong margin expansion. The current softness in crude and commodities should help margin expansion in the coming quarters. Hence, an economy that is expected to grow at 6% sustainably in the long term, and has the potential to register 13-15% sustainable earnings growth, is not really expensive at 20x. We believe that multiples are in a fair zone and will likely sustain despite the resurgence of the US and China. India shall maintain its weight in the light of its core economic strength and FPI flows should come back strongly.
Therefore, we remain fairly bullish on India and believe that this is the start of a multi-year story. India will likely remain one of the fastest-growing economies in the world for some time to come. So, the time to invest in Indian equities…is now! However, remember when investing, invest only in Good and Clean businesses.
(Manish Jain is a Fund Manager at Coffee Can PMS, Ambit Asset Management. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)