“The peak cycle for commodities and metals got extended this time due to the Ukraine situation. However, with more supply coming on stream and global trade opening up, the metal prices have corrected sharply and we expect them to continue to trend downwards,” Abhay Agarwal, Founder and Fund Manager at Piper Serica, said in an interview to Moneycontrol.
Therefore, “we do not see metal stocks as good buys right now,” he added.
RBI has already guided to normalisation of repo rates to pre-Covid level of 5.75 percent. Hence he said it is highly likely that the increase will be front-ended in the June meeting.
Market seems not to be in a position get firm direction on either side as it has been moving in a range. Do you think this consolidation will continue throughout in the second half of the current calendar year or will there be a possibility of market returning to record highs by end of this year?
Market is trying to find a bottom after a one-way correction from the beginning of the year. The selling intensity has abated as the market has got into an oversold zone. However, even now investors are wary of bottom fishing and there are few buy-on-dip investors left. Decadal high drawdowns in the NAV of large global hedge funds have significantly reduced the hot money from the markets.
Therefore, for the next couple of months a sideways consolidation is required for the long-term investors to build the confidence that markets have truly bottomed out.
We believe that markets have done well so far in dealing with the known risk factors and any improvement in global macro factors will bring money into the markets.
In the current consolidation, have you picked any theme that has to be a part of portfolio?
With interest rate cycle conclusively reversing, we expect the USD to strengthen as funds flow back to the US. Therefore, exporters of goods and services to the US will benefit as they will be able to protect their margins. IT and pharma should do well in such a situation.
With a sticky inflation over the next year, we expect companies to invest in tech to improve their internal processes to cut costs. Therefore, suppliers of IT products and services should do well. With travel opening, we expect hotels to do well, especially those catering to business travel.
Do you think rising Covid cases in the country pose a bigger risk now?
It is not yet a big concern since the rate of hospitalization is low, and recovery is fast. However, if numbers increase to a level that they put extraordinary pressure on the healthcare infrastructure we can expect some local lockdowns. However, the markets are not expecting any national level lockdowns.
One sector that hit badly in the last two months is metal index which fell 21 percent. Do you think it is a good buy now?
The peak cycle for commodities and metals got extended this time due to the Ukraine situation. However, with more supply coming on stream and global trade opening up the metal prices have corrected sharply and we expect them to continue to trend downwards.
Therefore, we do not see metal stocks as good buys right now. Any rally in metal stocks should be used as an opportunity for investors to exit these stocks.
Most experts expect around 40-50 bp hike in repo rate in June policy meeting. Are you in the same camp and what are the sectors that will get impacted if the rate hike continues in coming policy meetings?
RBI has already guided to normalization of repo rates to pre-Covid level of 5.75 percent. It is highly likely that the increase will be front ended in the June meeting.
We believe that brunt of the rate increase will be borne by consumer discretionary sectors like real estate and autos. We also expect banks to get impacted since they will see a shrinkage in net interest margins and higher credit costs.
Considering the current consolidation which we have been seeing for more than 8 months now, do you think the worst is fully discounted by the market?
The market is discounting the ‘known’ worsts – high inflation, supply chain disruptions, increase in interest rates and continuous selling by the FPIs (foreign portfolio investors). However, it is still wary of ‘unknown’ worsts that may suddenly emerge and create a perfect storm for another round of sharp correction.
Therefore, it is very important for the current negative events to play out while the markets consolidate at the current levels. Investors should brace for volatility over the next couple of months and use the opportunities wisely to pick high quality companies in case there is another sharp sell-off.
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