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The US Fed is behind the curve and they’ve got a lot of catching up to do, said Dan Fineman, Head of Equity Strategy, Asia Pacific, at Credit Suisse, in an exclusive interview with CNBC TV18 on March 22.
He expects quite a lot of rate hikes and believes that what the market has been pricing in is too low. “All the risks are to the upside as far as how much the Fed will need to hike to bring inflation back under control,” he said
Speaking on the sidelines of the 25th Credit Suisse Asian investment conference, Fineman is of the opinion that markets haven’t yet fully priced in how much the Fed’s going to hike.
US Fed interest rate hikes
“I think that some of the high PE stocks will be vulnerable and if we factor in the Ukraine and oil prices that adds a complication but I wouldn’t yet assume that we’re heading into a bear market because although the Fed needs to be aggressive, it’s starting from a very low base,” he said. “We probably won’t get to even neutral monetary policy territory until sometime next year and that provides some headroom before we really have to face some severe headwinds.”
Indo-China comparison
While drawing a comparison between India and China and the shift of funds that is taking place from India to China, Fineman said, “We had favoured India over China for over a year, up until just two weeks ago, when we made a call for investors to switch from India to China.”
On a tactical basis he still likes India from a long-term perspective due to where India is in the cycle but it’s also very vulnerable to higher oil prices and global rates, he pointed out. This is where China scores over India; it is very insulated from the Fed rate hike cycle because of its closed capital account and moderate oil import bill.
He is of the opinion that the change in policy direction that came from China last week is a very welcome change and there are high chances of China outperforming the rest of the region on a 6-12 months’ basis. “I mean China is easing when everyone else everywhere is tightening”.
Views on crude & commodity prices
In his opinion, oil is going to remain highly volatile and highly sensitive to news flows over sanctions and how the situation develops in Ukraine. “I think investors need to be prepared for either outcome, i.e. for either a significantly higher oil price from current levels or something significantly lower”. In general, he is overweight on stocks that benefit from higher commodity prices whether it’s non-energy commodities or energy.
Factors impacting the bank’s India reentry
Credit Suisse will look for opportunities to come back to India and for that to happen the two most important issues in his opinion are valuations and oil prices.
One of the problems for India right now is the big premium at which it trades compared to the rest of Asia. “India has always been an expensive market on a PE basis relative to other Asian markets but right now the premium is close to an all-time high, so a lower premium would be one factor,” he said.
“The other factor is oil prices, if we can negotiate a settlement in Ukraine or any other factor that could give us comfort that oil was going to be coming down to a better level, that would also encourage us to come back to India.”
New-age tech companies vs old IT services companies
Fineman said that he would be biased towards software companies that are profitable in the present as opposed to tech companies that are profitless. He highlighted that “if you have higher rates that’s going to hurt the companies that have their cash flows backloaded into the future while it will hurt less for the companies that are making money in the present”.
He suggested that software companies that have a big presence in the US stand to gain a lot from high US inflation, particularly wage inflation, because when US wages go up these companies become more competitive.
Banking or IT sector
Asked where he would put his money between banks and software companies whenever he makes a comeback to India, he said he liked both sectors from an investment point of view.
In his opinion, software companies that are gaining in competitiveness have a good structural view. “But we think that India is at the cusp of a potentially good property and credit cycle. If the global situation gets settled, that would make banks very interesting,” he said. “I think both of those sectors would be at the top or close to the top of the list where we would be telling people to buy into.”
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