Rupen Rajguru, Head – Equity Investments and Strategy at Julius Baer India
Trade is slowing down in major economies like the US, China and Europe. These are also biggest markets for Indian goods and services. The sluggish trade is going to impact emerging markets that are already grappling with high inflationary trends.
“The markets will also be influenced by incremental news flows related to central bank actions, especially the US Fed, and inflationary trends,” says Rupen Rajguru, Head of Equity Investments and Strategy, at Julius Baer India.
The dollar is likely to strengthen more this year on safe-haven demand, particularly if Europe falls into recession, he shares during an interaction with Moneycontrol. “This is a major headwind for emerging markets.”
In the short-term, he says, there could be some technical pull-backs in the markets, considering the excess pessimism that seems to be floating around and the over-sold conditions that we are into.
Excerpts from the interaction:
What is your reading on the March quarter earnings announced so far and commentaries by the management?
The buzzword during the March 2022 quarter earnings has been ‘inflation’ and the results depict a divergent operating performance trend between the ‘commodity consumers’ (consumer staples, durables, autos – earnings got significantly impacted) and ‘commodity producers’ (energy upstream, materials/metal companies posted record profits).
Besides sectors like private banks, NBFCs and technology are not directly impacted by rising prices (at a margin the banks’ NIMs increase initially during the interest rate upcycle).
Apart from inflation, the management commentaries highlighted that the sentiment is also impacted by the central banks tightening the key policy rates and long-drawn geopolitical crisis coupled with a fresh wave of Covid-19 in China, which have further disrupted the supply chains. The impact of these will be seen at least in the next one-two quarters of earnings.
What are the sectors where you turned overweight and underweight, especially after the earnings season?
After the earnings season, there hasn’t been any significant change in our stance. We continue to prefer large-caps over mid-caps, and our sector preference remains towards domestic cyclical such as BFSI, Industrials, and Real Estate ancillaries.
We remain underweight towards the consumer staples and mid-cap IT. We also like sectors that outperform during inflationary times (such as Utilities), select commodities, and those that would benefit from a depreciating rupee (especially pharma).
We would avoid high PE (price-to-earnings) stocks, or stocks whose maximum value is derived from the terminal value, as rising interest rates will lead to PE de-rating and a cut in the DCF (discounted cash flow) valuations.
Have you seen a significant change in earnings estimates for this year, given the inflation concerns and expected interest rate hikes?
For India Inc, the next two quarters are going to be challenging on the earnings front, as the margins will come under pressure due to higher input costs, and the corporate commentaries will worsen before it gets better.
While the Nifty has not seen much earnings downgrade so far (thanks to upgrades in Energy and neutral-to-no impact in IT/BFSI), the broader universe is clearly bearing the brunt of commodity prices.
What are the key factors that will keep influencing the equity markets in the coming months? Do you see any possibility of the market returning to record highs or it’ll remain range-bound?
The markets will continue to remain influenced by incremental news flows related to central bank actions, especially the US Fed, and inflationary trends. In the short-term, there could be some technical pull-backs in the markets, considering the excess pessimism that seems to be floating around and the over-sold conditions that we are into.
Even from the FIIs perspective, they seem to be holding one of the lowest net long positions in the recent times in the F&O segment, which can trigger some short covering in case the markets were to start moving up. However, we seem to be into a slightly long-drawn phase of consolidation for the markets with bouts of significant intermittent volatility.
Do you expect the Reserve Bank of India to hike the repo rate by another 40-50 bps in the June policy meeting?
In a recent media interview, RBI Governor Shaktikanta Das indicated that a repo rate hike is a ‘no brainer’. The RBI will weigh the risk of further inflationary upside, fuelled by the Ukraine crisis, against domestic growth from sanctions or potential slackening of demand.
The RBI MPC minutes have reinforced the necessity to frontload withdrawal of policy accommodation amid the increasing risk of inflation expectations getting unanchored. Considering that RBI has already done out of turn 40 bps rate hike, they might increase the repo rate by 25bps in the upcoming June policy. Overall, we expect an incremental 75-100 bps rate hike in FY23.
Do you expect a slowdown in emerging markets, including India, this year due to dependency on crude and trade? Also, do you think the expected strengthening of the US dollar will impact emerging markets?
There is really a mix of conditions for emerging markets like India because of their dependence on crude oil. It is unlikely that crude prices will cool off in the near term as uncertainty over the Russia-Ukraine war coming to an end is looming large. Trade is slowing in countries like the US, China and Europe – the major markets for India. This will have a slowdown effect on the emerging markets including India. The dollar is likely to strengthen more this year on safe-haven demand, particularly if Europe falls into recession. This is a major headwind for emerging markets.
Metal is the biggest loser in recent corrections. Is it the time to go overboard on this space?
Metal stocks have plunged after the government-imposed export duties on iron ore and some steel intermediaries a few days back. Historically, it has been difficult to have a structural view of the Metal stocks and they have at best been a tactical play as there are too many moving parts involved on both the demand and supply sides. (China is the key factor for both).
The reopening of China with a stimulus can alter the current landscape of metal demand and prices globally. The companies are currently trading in the range of 4-5x FY23e EV/EBITDA and are having a healthy balance sheet and hence this sell-off can be seen as a tactical buying opportunity, however with a strict stop loss.
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