Joseph Thomas, Head of Research, Emkay Wealth Management
The situation that we are encountering today is a bull market correction. The correction is quite deep with a fall equivalent to 15 percent from the peak levels. But it is too early to say whether the market has turned bearish, says Dr. Joseph Thomas, Head of Research at Emkay Wealth Management.
Joseph Thomas has a rich experience of three decades in covering economy, markets, portfolios and financial products segments.
After the recent sharp correction, “the Indian market is fairly valued at this juncture. This makes the market attractive, and a good buy from a longer-term perspective. But the challenge is how to maintain the momentum of economic growth, and to reduce the adverse impact of inflationary pressures that may accelerate in the coming months,” says Joseph with a rich experience of three decades covering economy, markets, portfolios and financial products segments.
Are we moving towards bear market territory by any chance?
If you look at the broader trend it has been one of long-term bullishness. The occasional distractions included the outbreak of the pandemic and the market fall after that. Then came the normalization of liquidity and interest rates, something which is still on at present. And finally, the war situation in Eastern Europe. We have seen the market recovering after every fall.
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When we look at the cyclicality of these trends, it can be very clearly observed that there are bear market rallies and bull market corrections. The situation that we are encountering today is a bull market correction. The correction is quite deep, with a fall equivalent to 15 percent from the peak levels. But it is too early to say whether the market has turned bearish.
The selling by FIIs is mostly related to factors that are exogenous especially the US-centric factors. However, bearishness could start creeping in gradually if the GDP growth starts slowing down, and consequently the earnings too start shrinking.
The high oil prices, the weak Rupee, likely ballooning of current account deficit, the already high domestic inflation etc. will have some impact on growth in the coming months. The extent to which these may impact the corporate profitability would decide which way the markets would trend in the medium to long term.
Is India still looking highly valued market given the relentless selling by FIIs?
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The Indian market is fairly valued at this juncture given the fact that the markets corrected in last few weeks. This makes the market attractive, and a good buy from a longer-term perspective. But the challenge is how to maintain the momentum of economic growth, and to reduce the adverse impact of inflationary pressures that may accelerate in the coming months.
The selling by FIIs may continue for some more time, till the US policy initiatives are set in motion, and the yield movements saturate. Stability in currency rates also would be a necessary pre-condition before the overseas investors could turn buyers.
Do you think stagflation risks have gone up significantly now?
We are already in a position to visualize a scenario of declining economic growth and higher inflation. Inflation galloped up in the US and in European countries. The fall in economic growth is the result of persistently high prices of goods, commodities, and services. There is a saying that high price is its own cure. That is where it gradually starts hurting growth and finally growth stagnates.
Despite all this, the dynamics of the broader economy has a magical power by which it could just turn around and start putting out the green shoots again. It is too early to say whether the classical stagflation situation will develop or not, but it is certainly clear that modern economies like India and China have the inbuilt capacity to ward off such events.
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History suggests that war never hurts equity markets in the medium to long term and corporate earnings & economic growth are actual drivers for the market. What is your view?
That is correct. The impact usually is in the immediate term. But in the present case, the likelihood of the confrontation getting prolonged is very high especially because the sanctions imposed against Russia will not go away anytime soon. The same way Russia too would be imposing measures on countries which have been unfriendly to them in their view.
Unfolding these notes is particularly arduous task going by the previous regimes of sanctions. While growth and the resultant earnings are what is material to the performance of the markets, the disruptive nature of some of these factors cannot be ignored. At the same time, it makes immense sense accumulating for the portfolio when the market has cheapened up significantly.
Do you expect quick recovery after easing of Ukraine-Russia war or after the damage, is the recovery going to take time?
The active phase of the war could come to an end anytime soon after the negotiations, but the latent part of it which could be linked to the sanctions imposed on Russia and its after-effects may continue for a year or two before it could normalize.
We may see a recovery very soon after the negotiations and positive statements from both parties, if at all it happens. But the long-term impact of the sanctions may have continued adverse impact mainly from the fuel angle for along time. It is this Ukraine and Russia are both rich in primary products and the disruptions to supply of these products may have an adverse price impact.
Lot of analysts are worried that credit cycle could get deviated by the oil shocks. What is your view?
Oil shocks in larger economies like India and China which have a huge oil import content in the import bills is certainly detrimental to growth. For a rise of every ten dollars in oil price, approximately 25 basis points decline in growth could be expected. This reliance on oil imports leads to a weaker local currency, higher import costs, and higher domestic price level. This spiral in turn causes the interest rates or the market yields to move up, and this impacts the cost of funds and the long-term rate expectations. Therefore, if oil prices remain high for a considerably long time, it affects business calculations and spending plans.
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