Indian equity markets have shown tremendous strength so far amid the global turmoil. However, the looming fear of aggressive rate hikes by the US Fed has now increased volatility in domestic equities, even triggering declines. India’s stable domestic fundamentals in terms of robust financial and non-financial sector balance sheets, high forex reserves, anticipation of Capex revival, and increasing lucrativeness amongst foreign investors should cushion the markets in case of a mild recession, said Mahesh Patil, CIO, Aditya Birla Sun Life AMC in an interview with Harshita Tyagi of FinancialExpress.com. For fixed income, investors can stick with lower duration funds. They can also look at target maturity debt index funds matching their investment horizons to benefit from the increasing rate hike cycle, Patil added.
Where should investors look for fixed income?
Short-term rates have inched up significantly since the beginning of the current interest rate hike cycle. Despite peaking, global inflation continues to be at a much higher level. An aggressive rate hiking cycle by global central banks will also put pressure on RBI to raise rates. Hence, in a scenario of reducing liquidity and further actions by MPC members to fight inflation, we might witness an increase in rates at the shorter end of the yield curve. With increasing rates investors get an opportunity to lock in at a higher yield, hence, it is advised to stick with lower duration funds such as ultra-short, low duration, short-term basis risk-reward scenarios. Investors can also look at target maturity debt index funds matching their investment horizons to benefit from the increasing rate hike cycle.
What is your assessment of what could happen to markets if there is a global recession?
Incrementally, there are signs of global slowdown with the US reeling from high inflation, energy shortage in Europe and property sector woes in China. We reckon that India too will not be completely immune to a global recession. However, in case of a mild recession globally, which is already priced in by the markets, India’s stable domestic fundamentals in terms of robust financial and non-financial sector balance sheets, high forex reserves, the anticipation of Capex revival and increasing lucrativeness amongst foreign investors should cushion the markets. In case of global recession, large caps which have more linkages to the global economy might remain range-bound whereas the broader markets should perform better due to domestic linkages and correction in commodities. Also, given that India is a major commodity importer, a moderate economic slowdown will act as a blessing in disguise for our economy through lower imported inflation.
How do you see the interest rate hike cycle, cool off in commodity prices impacting markets?
At the beginning of any rate hike cycle, valuations do tend to see moderation as the market incorporates higher risk-free rate assumptions. Inflation in the US has surprised on the upside and the market is pricing in aggressive rate hikes by the Fed and other central banks till the end of this year. With messaging from the Fed changing swiftly towards a higher terminal rate, we reckon this will bound to have some impact on valuation multiples and investments globally which will create some headwinds for equity markets. However, we do not see the RBI hiking rate considerably and expect the terminal rate to be 6.25%. In terms of commodity prices, we have seen some respite lately. Though there has been a slight compression in earnings growth for FY23 due to this, we believe the bulk of commodity price inflation is trending lower and the worst of gross margin pressures would be done by Q2FY23. The impact of reduced commodity cost is expected to show up in margins in the coming quarters and overall, we have baked in margin expansion from H2FY23 onwards which should continue in FY24. This is positive for markets.