Dhananjay Sinha, JM Financial Institutional Securities
The deepening Ukraine-Russia standoff is fueling a spurt in energy prices and driving global crude prices to exponential highs that would eventually translate into slower global growth, says Dhananjay Sinha, Managing Director and Chief Strategist at JM Financial Institutional Securities.
The crude prices are about to kiss $ 100 a barrel amid supply concerns, as the West slaps sanctions on Russia, the third largest oil producer in the world.
On the financial front, Sinha shares with Moneycontrol that given the potential 7-10 percent depreciation in INR/USD on the Real Effective Exchange Rate basis, and the expected rise in the India-US short term rate differential to over 540bp, the Indian rupee may weaken to 80 a dollar and the 10-year G-sec yield may harden further to 7.75-7.50 percent. The 10-year bond yield rate was 6.75 percent on Tuesday.
Excerpts from the interview:
Do you think the Ukraine-Russia tensions will keep the market nervous in the short term?
The impact of the Russia-Ukraine conflagration is unfolding and it is a fulcrum of a wider conflict between the US and Europe on one side and Russia on the other. From the Russian point of view, it is also veering towards China’s participation. Hence, while on one hand, it has an implication of rising energy prices, including global crude prices, on the other, it can translate into slower global growth.
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Hence, it will be premature to say that the problem has been entirely priced in. However, the news about Russian troops retracing marginally is a positive incremental development.
What are the great investment themes that one has to consider in the current market fall?
We continue to remain focused on large-cap companies in the areas of urban consumption space which includes autos, QSRs (quick-service restaurants), durables and other discretionary. The IT sector can perform well after the recent correction. Private banks can start performing after last year’s underperformance. In the wake of elevated crude prices, upstream oil companies can also do well.
Do you think the expected rate hikes by the Fed has started discounting by the global markets?
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We don’t really think so. The rate hikes, balance sheet contraction of the US Fed, are yet to begin and hence it will be hasty to say that the outcomes and implications are priced in.
Can the US bond yields cross the psychological 3 percent mark in the short term?
We think the US 10-year yield can rise to 2.5 percent and above, especially after the US initiates the balance sheet shrinkage.
Do you think the current market volatility and correction could impact LIC IPO?
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We don’t see too much of an implication from the wider market standpoint. But, over time, it can erode the market cap of other stocks in the financial services space.
Do you think the RBI may start raising key policy rates towards the end of 2022?
Amid the re-emergence of CAD (current account deficit), the expected decline in net capital inflows to 1-1.5 percent of the GDP, slowing growth, higher core inflation, and negative gap between the estimated optimal and actual forex reserve ($ 660 billion versus $ 630 billion and October 2021 peak of $ 642 billion), the RBI’s ability to prevent INR/USD depreciation and still manage low rates, accommodative financial condition and inflation target will become very tricky.
Given the potential 7-10 percent depreciation in the INR/USD on the REER basis, and the expected rise in the India-US short term rate differential to over 540bp, we anticipate INR/USD to weaken to 80 and 10-year G-sec yield to harden further to 7.75-7.50 percent. The RBI is expected to increase the reverse repo rate by 100-110bp from Q2 2022 in response to the sustained rise in core inflation, currency depreciation and US rate hikes.
Risk to inflation can come from crude oil prices rising above $ 100 a barrel and resurgence in commodity prices, which will impel a strong Fed response.
Is it the right time to invest in banking and infrastructure segments?
We will be selective in the BFSI sector, focussing more on large private sector banks. Our choices are guided by (a) extent of growth capital, (b) favourable asset-liability management position to gain from rising interest rates, and (c) ability to gain market share.
Do you expect the flow into equity and equity-oriented schemes to remain strong in the rest of 2022?
We think the pace will stabilise at a moderate level due to normalisation of surplus domestic liquidity.
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