ET OnlineThe stock markets are at the crossroads. Global markets are haunted by fears of rescission and steeper rate hikes. Indian markets are holding up, though the nervousness is evident. Shivani Bazaz of ETMutualFunds spoke to Anoop Bhaskar, Head-equities, IDFC Mutual Fund, to get a sense of what is in store for equity mutual fund investors. “returns from April 2020 are clearly unsustainable and should not be used as a referral point for future. Given the liquidity equity and especially equity mutual funds offer should also be an integral part while allocating for the future,” says Bhaskar.
Inflation and interest rates are once again in focus. How bad are things in the Indian scenario?
India’s macroeconomic indicators, while nowhere near being pristine in absolute levels look healthier on a relative basis. Given that Europe is reeling from high energy prices post the invasion of Ukraine by Russia and China enforcing strict lockdowns on re-emergence of Covid-19 cases (along with a deflationary trend in the property sector) and the US‘s CPI staying above 9% (driven by the steep movement in rents – 40% + weight in the CPI Index), India’s CPI inflation trend of 7% appears modest. The global inflation bug is real, even Japan is recording CPI movement above its “upper band” of 2.8%.
The RBI is expected to hike rates once again by half a per cent this week. What is your view?
RBI Governor has been emphatic on not derailing growth as a key consideration while acknowledging the higher level of inflation. Also, FY 23 may also register record fundraising by GoI to fund the fiscal deficit. Surely, RBI will be cognizant of this as well while formulating an interest rate path to be followed in the future.
Indian stock markets show some resilience, but the nervousness is very apparent. Is India decoupled from the happenings around the globe?
De-coupling was a fashionable term used in 2007-08 before the great financial crisis (GFC). Buoyed by the strong growth registered by China from 2002 onwards, for a period of time, emerging economies were the main driver of global growth led by China. So, it was believed that emerging markets had “de-coupled” from the developed world in terms of their economic growth engine. However, capital flows continue to be “intensely” coupled, more so after the GFC. Post the GFC, US$ strengthened, and flows reversed impacting almost all EM currencies. This impacted EM equity performance as well.
Given this context of de-coupling, in the current scenario, US$ has again gained strength against all major currencies, just as it did in 2008-09. More so, US interest rates – 4% + yield for 2-year Govt Treasury Bonds make it even more attractive. Hence, EM currencies are hurting and Central Banks across the world have been depleting their reserves to limit the depreciation of the local currency. For an entirely different reason as compared to 2008-09 – US$ is again strengthening and could stir EM equity markets as a consequence.
India, like several other emerging markets, has witnessed a large rebound from local investors investing in equities post-Apr ’2020. This has cushioned the withdrawal of FPIs from emerging markets. This has given credence to the belief that Indian markets may have “de-coupled” from the global situation. The harsh reality is that the stock of total FPI investments in Indian equities is roughly $500-550 bln, of which roughly $30 bln has exited since Oct’21.
Critics point out that we can’t be totally untouched by all the troubles around the globe. What is your assessment?
As mentioned earlier, we are relatively better off in the global context, our economic cycle is on the upward path with room before peaking; real estate has revived after going through a painful phase of consolidation from 2014-20, Indian corporates are deleveraged like never before, Indian banking system is well capitalized and for once bad loans have been fully provided for – even for PSU banks. Against these positives, valuations are “steaming hot” with several “pockets of exuberance” spread across all market cap segments.
What are the factors we should watch out for? For example, some say the Indian forex situation is worrying.
The trajectory and tone of the US Fed will be most watched. US Fed Chairman, clearly wants to be remembered along Paul Volcker (who “slayed inflation in the early ‘80s) rather than as the second coming of Arthur Burns, who oversaw inflation rage through the ‘70s. Hence, the tone has been stentorian rather than conciliatory. While the US Fed will remain the main event, Europe and China have enough weight to impact investors in the near term. A more positive message will be expected from the Indian economy in the coming quarters, especially with the drop in commodity prices and even crude oil trending lower.
IT sector is already under pressure. Do you think the sector is going to feel the pinch because of the looming global recession? What should investors do?
Clearly, IT has been a big winner during the Covid years, we are truly in the digital age. While the path to digital is undeniable, the pace at which it is adopted by companies may depend on the “economic mood”. However, given the “centrality” of IT - how a company competes, thrives or succeeds, IT spending will be central to global companies’ cap-ex spending in the future as well. The growth rates of six quarters till December 21, may not be repeatable, at least in the near future. With lower topline growth, companies may focus on cost and margins. The IT industry has successfully waded through such phases in the past and remained relevant for Indian investors. The same should be true going forward as well.
What should equity mutual fund investors do? Considering the year is almost ending. What’s your outlook for the next year?
Equity has emerged as the most important financial asset, perhaps replacing real estate, which used to be the most relevant asset for household savings. However, returns from April 2020 are clearly unsustainable and should not be used as a referral point for future. Given the liquidity equity and especially equity mutual funds offer should also be an integral part while allocating for the future. Equity returns will be moderate going forward, as current valuations are elevated. Investors should not increase or decrease allocation towards equity based on the trailing 12m or 24m returns but as a part of an overall allocation across different asset classes. Surely, reducing equity weight is as important as building equity allocation. Invest in equities with confidence and through cycles to realise its full potential.
Inflation and interest rates are once again in focus. How bad are things in the Indian scenario?
India’s macroeconomic indicators, while nowhere near being pristine in absolute levels look healthier on a relative basis. Given that Europe is reeling from high energy prices post the invasion of Ukraine by Russia and China enforcing strict lockdowns on re-emergence of Covid-19 cases (along with a deflationary trend in the property sector) and the US‘s CPI staying above 9% (driven by the steep movement in rents – 40% + weight in the CPI Index), India’s CPI inflation trend of 7% appears modest. The global inflation bug is real, even Japan is recording CPI movement above its “upper band” of 2.8%.
The RBI is expected to hike rates once again by half a per cent this week. What is your view?
RBI Governor has been emphatic on not derailing growth as a key consideration while acknowledging the higher level of inflation. Also, FY 23 may also register record fundraising by GoI to fund the fiscal deficit. Surely, RBI will be cognizant of this as well while formulating an interest rate path to be followed in the future.
Indian stock markets show some resilience, but the nervousness is very apparent. Is India decoupled from the happenings around the globe?
De-coupling was a fashionable term used in 2007-08 before the great financial crisis (GFC). Buoyed by the strong growth registered by China from 2002 onwards, for a period of time, emerging economies were the main driver of global growth led by China. So, it was believed that emerging markets had “de-coupled” from the developed world in terms of their economic growth engine. However, capital flows continue to be “intensely” coupled, more so after the GFC. Post the GFC, US$ strengthened, and flows reversed impacting almost all EM currencies. This impacted EM equity performance as well.
Given this context of de-coupling, in the current scenario, US$ has again gained strength against all major currencies, just as it did in 2008-09. More so, US interest rates – 4% + yield for 2-year Govt Treasury Bonds make it even more attractive. Hence, EM currencies are hurting and Central Banks across the world have been depleting their reserves to limit the depreciation of the local currency. For an entirely different reason as compared to 2008-09 – US$ is again strengthening and could stir EM equity markets as a consequence.
India, like several other emerging markets, has witnessed a large rebound from local investors investing in equities post-Apr ’2020. This has cushioned the withdrawal of FPIs from emerging markets. This has given credence to the belief that Indian markets may have “de-coupled” from the global situation. The harsh reality is that the stock of total FPI investments in Indian equities is roughly $500-550 bln, of which roughly $30 bln has exited since Oct’21.
Critics point out that we can’t be totally untouched by all the troubles around the globe. What is your assessment?
As mentioned earlier, we are relatively better off in the global context, our economic cycle is on the upward path with room before peaking; real estate has revived after going through a painful phase of consolidation from 2014-20, Indian corporates are deleveraged like never before, Indian banking system is well capitalized and for once bad loans have been fully provided for – even for PSU banks. Against these positives, valuations are “steaming hot” with several “pockets of exuberance” spread across all market cap segments.
What are the factors we should watch out for? For example, some say the Indian forex situation is worrying.
The trajectory and tone of the US Fed will be most watched. US Fed Chairman, clearly wants to be remembered along Paul Volcker (who “slayed inflation in the early ‘80s) rather than as the second coming of Arthur Burns, who oversaw inflation rage through the ‘70s. Hence, the tone has been stentorian rather than conciliatory. While the US Fed will remain the main event, Europe and China have enough weight to impact investors in the near term. A more positive message will be expected from the Indian economy in the coming quarters, especially with the drop in commodity prices and even crude oil trending lower.
IT sector is already under pressure. Do you think the sector is going to feel the pinch because of the looming global recession? What should investors do?
Clearly, IT has been a big winner during the Covid years, we are truly in the digital age. While the path to digital is undeniable, the pace at which it is adopted by companies may depend on the “economic mood”. However, given the “centrality” of IT - how a company competes, thrives or succeeds, IT spending will be central to global companies’ cap-ex spending in the future as well. The growth rates of six quarters till December 21, may not be repeatable, at least in the near future. With lower topline growth, companies may focus on cost and margins. The IT industry has successfully waded through such phases in the past and remained relevant for Indian investors. The same should be true going forward as well.
What should equity mutual fund investors do? Considering the year is almost ending. What’s your outlook for the next year?
Equity has emerged as the most important financial asset, perhaps replacing real estate, which used to be the most relevant asset for household savings. However, returns from April 2020 are clearly unsustainable and should not be used as a referral point for future. Given the liquidity equity and especially equity mutual funds offer should also be an integral part while allocating for the future. Equity returns will be moderate going forward, as current valuations are elevated. Investors should not increase or decrease allocation towards equity based on the trailing 12m or 24m returns but as a part of an overall allocation across different asset classes. Surely, reducing equity weight is as important as building equity allocation. Invest in equities with confidence and through cycles to realise its full potential.
(Catch all the Mutual Fund News, Breaking News, Budget 2024 Events and Latest News Updates on The Economic Times.)
Subscribe to The Economic Times Prime and read the ET ePaper online.
Read More News on
(Catch all the Mutual Fund News, Breaking News, Budget 2024 Events and Latest News Updates on The Economic Times.)
Subscribe to The Economic Times Prime and read the ET ePaper online.
Get Unlimited Access to The Economic Times
